Are Auto Accident Insurance Settlements Taxable?

/ / Law Blog

Tax season is here, and that means there are bound to be a lot of unique questions regarding what you can and can’t claim. One inquiry in particular that gets brought up from time to time is whether auto accident insurance settlements are taxable.

Let’s see what the IRS says regarding this matter to provide you with a clear and concise answer. If you still have concerns regarding your taxes, we invite you to contact us at Crary Buchanan Attorneys at Law, and our auto accident lawyer will be happy to assist you further.

The IRS and Settlements: What’s the Scoop?

The IRS actually has a rule regarding settlement taxation and court judgments. You can find it at 26 C.F.R. 1. Without repeating a bunch of legalese, let’s focus on the sections that relate to auto accidents.

  • First, any damages you receive due to physical injuries or sickness can be excluded from your gross income. This includes both compensation for medical treatment and for pain and suffering.
  • Second, punitive damages cannot be excluded and therefore must be included.
  • Third, emotional distress is only exempt when they directly relate to a physical injury.

By and large, you don’t need to pay taxes on auto accident insurance settlements. However, you will need to consider the reason you received the money in your settlement to determine whether it is truly taxable. Therefore, let’s discuss compensation to get a better understanding.

Medical Care Compensation

Many people seek to sue the at-fault driver or file a lawsuit for physical injuries. Victims can be liable for thousands or more in medical bills due to these injuries. If injuries are severe, victims may need to be treated for many years.

You can get money out-of-pocket for medical expenses as part of a personal injuries settlement. Such expenses include:

  • OTC medication
  • Surgery
  • Rehabilitation
  • Assistive devices (wheelchair, crutches, etc.)
  • Prescription medication
  • Visits to the doctor
  • Hospital stays

Your out-of-pocket medical expenses and any future treatment should determine the amount of damages you are entitled to for medical care. According to the IRS, medical treatment amounts are not included in your income, so you won’t have to pay income tax.

Pain and Suffering Compensation

More than just economic losses for medical care, physical injuries can cause extreme cases of pain and suffering. To compensate, you can get money as part of a settlement. No amount of money can ever give your body back. While money won’t restore your health, it’s how the legal system works in this regard, thus providing some solace in knowing you’re being compensated for what you’re going through.

Moreover, your injuries will determine how much you receive. You will get less if you have been in discomfort for only a few months. Based on your evidence, the settlement amount will be equal to the amount that a jury would award. Jurors will use the evidence and their personal experience to arrive at a fair number.

The IRS doesn’t require you to pay taxes on pain and suffering damages that result from your physical injuries. Therefore, damages for pain or suffering are exempt from tax just as compensation for medical bills.

Property Damage Compensation

If you were in an accident that resulted in your vehicle suffering damages to any extent, and you were compensated, that money is yours and yours alone. Therefore, you don’t have to pay taxes on it.

Lost Income Compensation

Now we get to compensation that is taxable. When you are awarded monetary compensation for an injury that resulted in you missing work, the IRS expects you to pay taxes on it. Lost income compensation is included with your gross income when you file your taxes.

Punitive Damage Compensation

Punitive damages are not in the same category as medical bills or pain and suffering. As such, you will need to include any punitive damages awarded to you in your tax filings. If you need assistance with this or any other tax matters, be sure to speak with our auto accident lawyer at Crary Buchanan Attorneys at Law. 

We understand that tax matters can get confusing really quickly. That’s why we strive to make understanding tax law as easy and straightforward as possible. We’re here to help you every step of the way to ensure that you file your taxes properly and according to the IRS’s regulations.

At Crary Buchanan, we are committed to representing our clients to the fullest extent. You can expect nothing but the very best legal counsel, so get in touch with us today to speak with our auto accident lawyer.

Do You Have Questions about Your Taxes?

Call the experts at Crary Buchanan today to get the legal counsel you deserve. Whether you were recently in a car wreck or you have questions about your taxes, our auto accident lawyer can help. To schedule a consultation, call (772) 287-2600 or send us an email at info@crarybuchanan.com.

The information in this blog post is for reference only and not legal advice. As such, you should not decide whether to contact a lawyer based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.