Mathew B. Sims is Editor-in-Chief and has authored, edited, and contributed to several books. He has been working in the insurance industry ensuring content is accurate for consumers who are searching for the best policies and rates. He has also been featured on sites like UpJourney.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. He reviews content, ensuring that exis...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Apr 29, 2020

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Things to Remember...

  • Auto accident insurance proceeds used to repair your car are not considered taxable income by the IRS
  • The IRS taxes any money you receive that is considered income, not car accident insurance settlements
  • Consult a CPA to ensure you are following your state laws regarding taxable income because laws regarding taxation of insurance vary from state to state
  • In the event that an accident caused damage to your vehicle, but no bodily injury, you should not be taxed on proceeds from the insurance settlement
  • Auto insurance claims pay out between $14,000 and $20,000 per accident on average

In most cases auto insurance proceeds are not considered taxable income.

When you receive money for an insurance claim to fix your automobile, this is not considered taxable income by the IRS.

These funds are used to restore your vehicle to its condition before the car accident occurred. The funds cannot be used for anything other than repairing your vehicle.

The funds from a settlement are considered the restoration of capital and are therefore not taxable by the IRS. Start your search for the best auto insurance rates by entering your zip code!

Auto Accident Settlement Payments are Not Taxable Income

Depending on the specific situation auto accident insurance proceeds are taxable. Generally, anything that is considered a financial gain will be considered taxable income. We’ve got information on what makes auto insurance benefits taxable and what doesn’t!

Laws regarding taxation of insurance proceeds may vary by state. The general rule is that only financial gain is considered taxable.

Proceeds from your auto insurance company to repair your vehicle are not taxable income. This is only being used to restore your property back to its original state before the accident.

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What types of insurance proceeds are not taxable?

Are auto accident settlements taxable? If an accident results in a court case and/or an insurance settlement, the nature of the settlement determines taxation.

The parts of the settlement that cover injury are generally not taxed. This is assuming that the amount is taken directly from the medical expenses that have been incurred as a result of injuries sustained in the car accident.

Future medical expenses may also be included in a settlement that would also not be considered taxable. Future expenses may include medication that you are required to take as a result of injuries sustained in the accident.

Settlements will often use a three-year cutoff point for future medical expenses. Any expenses that happen more than three years after the accident are not usually covered.

In the event that an accident caused damage to your vehicle, but no bodily injury, you should not be taxed on proceeds from the insurance settlement.

A check that is written to repair damages is being used to fix your vehicle and nothing else. This is not a financial gain. You’re saved from taxation of insurance proceeds in this case!

If your car is totaled in the accident, the insurance company will pay you the value of your vehicle before the accident. The appraiser will determine based on market standards how much your vehicle is worth.

If you don’t have a lien on your vehicle, the insurance company will cut you a check for this amount. Since this is being used to replace the damaged property, it is not considered a financial gain. If the proceeds are not a financial gain, they are not taxable.

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What types of insurance proceeds are taxable?

Anything that is considered a financial gain will more than likely is taxable income. If an insurance settlement includes any amount for lost wages or pain and suffering, this is considered a financial gain.

An injury sustained from the accident may keep you out of work for a certain period of time. You may be entitled to a certain amount of compensation to cover for these lost wages from your insurance settlement.

Are these lost wages taxable? Just as your regular paycheck is taxed, the compensation for lost wages will be taxed.

  • Most settlements or judgments from car accidents are not taxable except for wages lost due to an accident
  • Lost wages is viewed as income which is taxable since you would have earned that money had you not been hurt in a car accident
  • Car accident victims who are being compensated should discuss their settlement and tax implications with their lawyer and tax advisor

A settlement may include pain and suffering if long-term injuries sustained in the accident prevent you from maintaining your normal lifestyle. This income will also be considered taxable.

What if my settlement includes payment for both medical expenses and property damage?

If you have an insurance settlement that includes amounts for lost wages or pain and suffering, it is recommended that you consult with a tax professional. The professional will be able to determine how much of your settlement is taxable based on the laws in your state. You can also research how insurance companies calculate car accident settlements.

The difficulty is that a settlement amount may include a certain amount for both medical expenses and property damage that was incurred as a result of the accident.

Also included will be the proceeds for lost wages, pain, and suffering. You will be able to sit down with your tax consultant and break down how much went towards each purpose to determine how much of the income is taxable.

It is important to keep records of all medical expenses that occur as a result of injuries sustained in the accident. This will help you during the court and/or settlement process.

Depending on your insurance policy, you should be entitled to any expense that occurred as a result of an automobile accident.

The records will also help you when you are filing your taxes. Having these records on file will be useful if you are audited by the IRS.

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Can I write off my auto insurance premium?

If you use your vehicle for business purposes, your auto insurance premium can be written off as a business expense. The details regarding this depend on the actual usage of the vehicle, type of business, and who is operating the vehicle.

It is best to consult a tax professional to determine what can be written off. For personal usage, auto insurance costs cannot be deducted, so unless you are well versed in tax preparation, you are far better served by hiring a tax professional as opposed to going it alone.

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Are insurance settlements for injuries sustained in an accident taxable?

Section 104(a)(2) of the federal tax code prevents personal injury damage settlements from being taxed by the IRS. In most cases, an insurance settlement will fall under this category.

If the settlement includes anything other than damages regarding a personal injury, then it would be considered taxable by the IRS.

If you are unsure if your situation falls under these guidelines, you may want to consult a certified personal accountant (CPA).

Your CPA will be able to determine if any amount of the settlement needs to be reported to the IRS.

If you hire your own attorney and are not provided one through your insurance company, the attorney fees may be subject to IRS taxes.

However, this is something that you would want to check with a CPA to see if your situation falls under these guidelines.

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What is considered taxable by the IRS?

Anything that is used to cover medical bills or damage to your vehicle as a result of an accident is not taxable. Everything else is considered income and is taxable.

If your insurance settlement includes anything for emotional distress or missed work, these funds are taxable by the IRS.

One of the primary purposes of insurance is to prevent you from falling into a deep financial hole as a result of an automobile accident.

Medical coverage that is required as a result of bodily injury from an auto accident is not being used to further your current situation but is simply correcting the damage from the accident.

You may receive a partial settlement for the amount of time you missed work. If you were working during the time you were in the hospital, those funds would have been taxed.

Emotional distress is another example of something that may increase your insurance settlement. Emotional distress is not usually covered under medical expenses.

Medical expenses are covered by insurance and are not taxable income, including money to cover medication into the future as a result of the accident.

Settlement charges may cover prescriptions given by the doctor or physician relating to an injury sustained from the accident.

The key is to know how much of the settlement is being allocated towards which category. When in a situation such as this, document all of your medical expenses. 

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Can I write off my deductible?

Your deductible is part of the plan for your insurance premium.

There may be rare circumstances in which you can write this off on your taxes.

You will have to consult the regulations and auto insurance laws in your state.

You may also benefit from consulting with a CPA to find out what options are available to you in your specific situation. Receive free auto insurance quotes today by entering your zip code below!

If you have recently experienced a car accident or have recently settled a car accident case with another party’s insurance company, you may be wondering about the tax implications of your settlement or judgment.

While this is something you should speak to your attorney and accountant about, the taxability of the settlement depends on the circumstances.

If you are looking for the cheapest car insurance premiums, try using an online comparison tool to get the best rates. Start comparing auto insurance rates now by using our FREE tool above!

Lawsuits Surrounding Car Accidents

Although frivolous lawsuits abound, there are still legitimate lawsuits surrounding car accidents.

Each year, thousands of people are killed or injured in car accidents that happened because of another party’s carelessness or inattentiveness.

Even if the injured party has insurance, it may not cover all of their medical or property damages or any of their pain and suffering.

In these types of cases, some people choose to seek compensation through the legal system.

Settlements and Judgments

Settlements and judgments are considered the same under United States tax law. The amount a victim and his lawyer demand from the at-fault party is based on many different factors.

Settlements are usually divided into the following different categories of compensation:

  • Lost wages – If the victim had to miss any work due to the accident and resulting necessary medical care, it falls in this category, even if benefits or PTO were used
  • Future lost wages – If the victim is now unable to work or will continue to be unable to work, future missed wages are accounted for within this category
  • Medical payments – The total amount of medical expenses incurred from the accident that are being paid, even if they are not paid out of the victim’s own pocket
  • Future medical care – If the injuries sustained by the victim will require future or ongoing medical care and treatments, they also have a right to be compensated for them
  • General damage –These damages account for the pain, suffering, and inconveniences to the victim. A multiplier between 1.5 and 5 is generally used to calculate this amount.
  • Property damage – This usually refers to the amount required to repair or replace the vehicle that was involved in the accident.

The type of compensation you are receiving will determine whether or not you are legally required to pay taxes on them.

However, any money received as a result of lost wages or any punitive damages received will count as taxable income.

You should speak with your lawyer and tax advisor for more information about paying taxes on your specific settlement and to get the best car accident settlement possible.

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How is the multiplier determined?

While most victim’s attorneys will recommend a multiplier of 4 or 5, opposing counsel may suggest a two or three.

However, there are cases where a multiplier of greater than 5 should be used.

Examples of these circumstances can include:

  • The other party’s fault is obvious and nearly total
  • The injuries of the victim are obvious
  • The injuries are painful and severe, requiring surgical treatment or on-going care
  • Recovery time is at least 6 months or longer
  • Medically documented permanent consequences exist, such as chronic pain, immobility, scarring, disfigurement, or weakness

Paying Taxes on a Car Accident Settlement

In most cases, you will not be required to pay federal or state taxes on your car accident settlement or judgment.

For tax purposes, money from a settlement or a court judgment is viewed the same. Tax laws apply as follows:

  • Monies Received for Medical Expenses and Injuries – Generally, these expenses are grouped into a lump sum and compensate the victim for several different categories known as compensatory and general damages. These are not considered to be income under U.S. tax code since it is meant as a reimbursement for expenses you have already paid.
  • Money for Auto or Property Damage – Money received by accident victims for the purpose of compensating them for the loss or repairs made to their car or other physical property is also not taxable.
  • Lost Income Compensation – If your settlement included compensation for many different types of losses, as well as lost income, you must calculate the portion for lost income and count that as income on your income taxes.

Although rare, some victims will receive what is known as punitive damages which are reserved for cases where the defendant acted out intentionally or outrageously in causing the accident.

In the rare event that you receive punitive damages, you will be required by U.S. tax code to pay income taxes on them.

Not paying taxes on monies that should be included in your annual tax filing can have serious consequences.

Drivers can also save money by using an insurance premium comparison calculator online when shopping for car insurance.

Start comparing car insurance rates now by entering your zip code in our FREE tool below!

References:

  1. http://www.nolo.com/legal-encyclopedia/do-i-need-pay-tax-vehicle-accident-settlement-judgment.html
  2. http://www.nolo.com/legal-encyclopedia/is-your-personal-injury-settlement-taxable.html
  3. http://www.nadaguides.com/KelleyBlueBook
  4. http://www.injuryclaimcoach.com/is-settlement-money-received-for-lost-wages-taxable.html
  5. ps://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf
  6. http://apps.calbar.ca.gov/mcleselfstudy/mcle_home.aspx?testID=15
  7. https://accident-law.freeadvice.com/accident-law/auto/get-the-best-car-accident-settlement.htm
  8. https://accident-law.freeadvice.com/accident-law/auto/how-insurance-companies-calculate-settlements.htm