Are auto insurance settlements considered taxable income?

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Things to Remember...
  • Insurance proceeds used to repair your car are not considered income by the IRS
  • The IRS taxes any money you receive that is considered income, not insurance settlements
  • Consult a CPA to ensure you are following your state laws regarding taxable income

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!

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. 

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!

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