If you experience an accident for which someone else is liable, and you suffer damage as a result, you are entitled to compensation. A personal injury settlement therefore always ends with the situation that the liable party transfers an agreed sum of money to the injured party. That money is intended to compensate for the damage that has already been suffered, but also damage that you will suffer in the future. It often involves large amounts. An important question is how the tax authorities deal with this. Is the compensation regarded by the tax inspector as income or as capital? Is the compensation subject to tax?
Compensation in three components
If we look at the compensation you receive in a personal injury case, we see that it consists of three parts:
- Medical costs and costs for care, aids and facilities
- Compensation for grief: compensation for the pain and uncertainty associated with your situation
- Loss of earning power: a compensation of the estimated net income that you lost as a result of the accident
No income (box 1), but assets (box 3)
The first two parts of the compensation have nothing to do with your income. This concerns compensation for material and immaterial damage, so you do not have to pay income tax (box 1) on this. But does that also apply to the third component: the loss of earning capacity? After all, this damage component can be traced back to income.
In principle, you also do not have to pay income tax on this damage component. This is because the Supreme Court has determined that compensation for permanent loss of work capacity is tax-free (HR June 29, 1983). That is why this item of damage is also paid to you net.
However, your total compensation is regarded as capital, on which capital gains tax must be paid in box 3. These levies should, if all goes well, be included as tax damage in the settlement of the case, so that this is not at the expense of the compensation that is necessary to settle your damage. to cover.
In some cases, the government has made exceptions. Asbestos victims and victims of disasters do not have to pay wealth tax on their compensation.
Tax guarantee
Although these rules are clear, it does happen that the tax inspector classifies (part of) the compensation as income. Because you would then have to pay a substantial part of the compensation, it is important to object to this. In most cases, the paying insurers issue a tax guarantee, with which the insurer guarantees the amount of the compensation. Any levies will thus be borne by the insurer.
Knowing more?
Do you want to know more, or have you suffered an injury and are you looking for help with recovering your personal injury? Feel free to contact us without obligation.