Getting in a car accident can be a traumatic and painful experience. Add to that the confusion that comes while healing and trying to make sense of the intricacies of Michigan’s No-Fault and tax laws, you may be left wondering, are your no-fault benefits taxable?
While most payments made to an injured victim after a car accident are not subject to taxation, there are associated benefits in Michigan that are taxable. These are largely dependent on whether the benefit is considered income.
This is why it’s critical you work with the best Michigan car accident attorney to review any settlement offer to ensure you know where you stand when it comes time to pay taxes.
Are Your No-Fault Benefits Taxable? A Break Down
Solid car accident legal advice is invaluable. So don’t settle without understanding the impact it might have on paying your taxes.
As of the time of this publication, here are the answers to the most commonly asked questions about taxable accident benefits and settlements:
Are Pain and Suffering Settlements Taxable?
Typically, a Michigan car accident settlement for pain and suffering is not considered taxable income. This includes any pain and suffering compensation reached via a settlement or a jury’s verdict.
However, it’s important to note that if you wish to make your settlement confidential and your attorney agrees, it could render the entire amount taxable.
What About Personal Injury Protection (PIP) Benefits?
Personal Injury Protection (PIP) is the part of your No-Fault coverage that covers your medical benefits. These include medical expenses related to an injury, such as those for hospitalization, surgery, prescription medications, rehabilitation therapy, and medical equipment.
PIP is tax free. And this is the case whether you make the payments gradually or all at once as overdue benefits. However, it is important to mention that replacement services and attendant care, both of which are mentioned below, are taxable and technically included in PIP.
To qualify for tax-exempt status in Michigan, the damages paid apply to bodily harm only, however. Those paid exclusively for emotional injuries do not qualify as exempt under state tax law.
Are Payments for Lost Wages Taxable?
If you’ve received payment for lost wages, then you know it’s reduced to 85% of your normal income. Even so, you can receive this payment tax-free for up to three years.
If, however, your attorney claimed “excess” wage loss benefits because you will remain disabled beyond the included three years of No-Fault wage loss coverage, then the money you receive as part of a third-party tort settlement (social security or Medicare, for example) will be taxable.
In addition, if your monthly wage loss exceeds the monthly maximum of $7,014 (effective through September of 2025), that amount will be taxable.
What’s the Situation for No-Fault Replacement Services?
Replacement services benefits provide accident victims with help on chores they can no longer complete. The work is typically provided by a service or a family member who is paid.
Since (as mentioned above) this benefit involves income for another, these payments are taxable. They may not be subject to FICA and FUTA taxes, but you are responsible on your end to pay the taxes on their income.
Are No-Fault Attendant Care Benefits Taxable?
No-Fault attendant care benefits provide payment to a service or paid family member taking care of a car accident victim. It compensates them for their time and work.
Again, these benefits are taxable because they are considered income. Even if it’s a family member. Just as is the case with no-fault replacement services, these benefits may be exempted from FICA and FUTA taxes. Yet, you’re still responsible for them.
Will You Have to Pay Taxes on Disability Payments to a Guardian?
Finally, disability benefits received from a car accident settlement by a guardian on behalf of the victim under a No-Fault insurance contract is not included in the gross income. Therefore, disability payments are not treated as taxable income.
Don’t Get Caught By Surprise – Get Help From Kajy Law
If you were injured in a car accident in Michigan and are still left wondering, are my no-fault benefits taxable, it’s time to speak to an experienced lawyer.
Contact Kajy Law today to speak with one of our highly skilled car accident attorneys. They can categorize damages, explain tax exemptions, and identify taxable amounts as they apply specifically to your case.
So give us a call at 877-KAJY-CARES. Or contact us to schedule your no-obligation free consultation today. And stay in Uncle Sam’s good graces.
***Kajy Law are not tax attorneys and do NOT provide tax advice. If you have specific questions about your tax situation, we strongly encourage you to seek a licensed tax advisor or tax attorney.***
