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Are Car Accident Settlements Classified as Income in Tennessee?


Following a car crash, victims look forward to receiving their settlement check from an insurance company to be able to pay their medical bills and cover other expenses. If the victim had to take time off work or is unable to earn a living after the accident, receiving the settlement check would feel like a godsend.

While it is easy to forget about taxes when fighting for your compensation after a vehicle crash, you will need to determine whether your personal injury settlement is classified as income for tax purposes.

Generally, in Tennessee, you do not need to report your car accident settlement as income on your tax returns. However, there are exceptions to this general rule. You might want to consult with a Nashville car accident attorney to review your particular case.

Tennessee Law Does Not Tax Personal Injury Compensation

As mentioned earlier, any monetary compensation you receive from an insurer for your physical injuries stemming from a car crash or another traumatic event will not be taxed in Tennessee. The same principle applies regardless of whether you settled out of court or received compensation through a verdict.

Compensation for physical injuries after a car accident in Tennessee may include:

  • Past and future medical bills
  • Loss of income due to the injury
  • Physical pain and suffering
  • Emotional distress and mental anguish
  • Permanent impairment
  • Diminished earning capacity

If your pain and suffering, emotional distress, and mental anguish were the results of your physical injury, you would not have to report those funds as your income. Thus, you should not include these settlement proceeds in your income.

When Your Settlement Might Be Taxed (Exceptions to General Rule)

There are situations when a car accident settlement might be classified as income for tax purposes in Tennessee:

  • If your physical injuries were caused by a breach of contract, rather than negligence or another cause of action, any compensation you receive from pursuing a claim based on breach of contract could be classified as income for tax purposes.
  • If you are entitled to punitive damage because the defendant’s behavior is especially harmful, these funds are taxable in Tennessee. The purpose of punitive damages is to punish the defendant, rather than compensate the victim. For this reason, these damages are considered taxable income because they are not intended to compensate for your physical injury.
  • It takes time to settle a personal injury claim in Tennessee. When your lawsuit is pending, interest can accrue on your settlement. While you can receive interest for the time the suit was pending, those funds will be taxed.
  • Some legal claims are based on the infliction of emotional distress, workplace harassment, and other types of wrongdoing. Settlement in legal claims not stemming from physical injuries is also taxable in Tennessee.

If you are confused about whether your settlement will be classified as taxable income, contact our Nashville car accident attorney at Contact Calhoun Law, PLC, to evaluate your particular situation. Let us answer your questions by calling at 615-645-2015. We offer a free consultation.


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