Is a Car Accident Settlement Taxable in South Carolina?

Recovering from a car crash is stressful. Between doctors’ appointments and repairing your vehicle, you shouldn’t have to worry about a surprise tax bill. Many people in Charleston and across South Carolina ask, “Is my car accident settlement taxable income?” The answer is usually no, but there are important exceptions. You may have heard conflicting information from friends or on social media; we want to set the record straight. Our Charleston car accident lawyer explains the basics of settlement taxation so you can plan ahead and focus on healing.

Understanding Car Accident Settlements

When someone’s negligence causes an accident, the at‑fault driver’s insurance company often offers to settle rather than go to trial. A settlement is designed to compensate you for losses such as medical expenses, lost wages, property damage, and non‑economic harm like pain and suffering. In rare circumstances, courts award punitive damages to punish egregious conduct and deter similar behavior in the future.

A note on punitive damages: These are only awarded in personal injury claims if the plaintiff can can prove clear and convincing evidence the defendants actions were wilful, wanton, or reckless.

Money paid to make you whole for physical injuries is normally not treated as income by the IRS or the South Carolina Department of Revenue. That’s because it’s not a “windfall,” but a restoration of what you lost. Nonetheless, certain payments in a settlement can create a tax obligation.

Taxable vs. Non‑Taxable Components

Under Section 104(a)(2) of the Internal Revenue Code, damages for personal physical injuries or sickness are excluded from gross income. South Carolina follows the same rule. As long as your settlement compensates you for medical bills, lost wages tied to a physical injury, pain, suffering, or disability, you usually will not owe federal or state taxes. If you live in Charleston or anywhere in the state, there is no separate personal injury tax beyond these federal guidelines.

There are, however, four main situations where taxation arises:

1. Punitive damages and interest – Amounts intended to punish bad behavior or interest earned on a settlement are taxable.
2. Non‑physical injuries – Awards for emotional distress or reputational harm with no underlying physical injury may be taxable.
3. Previously deducted medical costs – If you claimed a deduction for medical bills and later recovered those expenses, you must “recapture” the deduction.
4. Wages unrelated to your injuries – If a settlement specifically designates money for lost wages unrelated to a physical injury or for breach of contract, that portion can be taxed.

Each case is fact‑specific. For example, lost income because you broke a leg in a crash remains excluded because it stems directly from a physical injury. Lost earnings from a separate employment dispute would not fall under the exclusion. Having a clear written agreement that allocates settlement funds among the different categories will help avoid confusion and ensure you comply with both federal and South Carolina tax rules.

Frequently asked questions about settlement taxation

Here are concise answers to common questions from South Carolinians:

• Can we label everything as medical expenses? The allocation must reflect reality. Falsely labeling punitive damages or interest as medical costs can lead to penalties.
• Do I need to disclose the settlement on my tax return? It’s wise to tell your tax preparer about any settlement, even if it’s fully excluded, so they can properly document the exclusion.
• Is there a state tax on my settlement? South Carolina generally mirrors federal law; if it’s excluded federally, it’s excluded for state purposes. Taxable portions like punitive damages and interest are taxed by both.
• Can I take a deduction for medical bills and still exclude the recovery? No. You cannot double-benefit. Recovered expenses previously deducted must be included as income.

See our full list of FAQs here and explanations

When in doubt, speak with a knowledgeable attorney. A brief consultation can prevent costly mistakes and give you peace of mind.

Remember, Trey Helps!

Negotiating an injury settlement and considering its tax implications can be overwhelming. Trey’s team serves clients in Charleston, Greenville, Summerville, and throughout South Carolina with compassion and professionalism. We will:

• Conduct a comprehensive investigation to document your losses.
• Negotiate assertively with insurers to obtain a fair settlement.
• Work with tax professionals to structure the agreement in a way that properly distinguishes between compensatory and potentially taxable damages.
• Keep you informed so you understand each step and feel confident in your decisions.

We also understand the local court system and filing requirements, which helps us protect your rights under South Carolina law. Trey Harrell’s experience as a former federal prosecutor and his commitment to personal attention mean you’re never just another case. While we can’t promise a specific outcome, we will advocate tirelessly on your behalf, answer your questions with patience, and make sure you feel supported from start to finish.

Free Consultation

Most car accident victims in South Carolina can rest easy knowing their settlements will not be taxed when they compensate for physical injuries. The key exceptions are punitive damages, interest, non‑physical injuries, and recovered expenses you previously deducted. By understanding these categories and getting professional advice, you can avoid unpleasant surprises.

If you have questions about the tax consequences of a settlement or need help after an accident in Charleston or anywhere in the state, remember, Trey Helps! Contact us free consultations and will guide you through your options with patience and care.