You may owe taxes on the auto insurance settlement you receive after the total loss of a vehicle depending upon your personal situation. We would advise you to consult with a tax accountant or with the Internal Revenue Service (IRS) to see if you will owe taxes on the settlement amount.

If you are good at deciphering tax laws you can read about auto insurance claims and taxes on the IRS website. Just as an example of what the IRS site says is that if you receive an insurance or other reimbursement that is more than your adjusted basis in the destroyed or stolen property, you have a gain from the casualty or theft. You must include this gain in your income in the year you receive the reimbursement.

The IRS defines adjusted basis as your basis in the property (usually cost) increased or decreased by various events, such as improvements and casualty losses.

If you receive an insurance payment or other type of reimbursement, you must subtract the reimbursement when you figure your loss. You do not have a casualty or theft loss to the extent you are reimbursed.

If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Otherwise, you cannot deduct this loss as a casualty or theft loss. However, this rule does not apply to the portion of the loss not covered by insurance (for example, a deductible). As an example the IRS says:

You have a car insurance policy with a $500 deductible. Because your insurance did not cover the first $500 of an auto collision, the $500 would be deductible (subject to the deduction limits discussed later). This is true even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible.

As for gains from reimbursement, if your reimbursement is more than your adjusted basis in the property, you have a gain. This is true even if the decrease in the FMV [fair market value] of the property is smaller than your adjusted basis. If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. See Publication 547 for more information on how to treat a gain from a reimbursement for a casualty or theft.

If you cannot decide using this and other tax information regarding your situation if you need to pay taxes or not you should consult with someone knowledgeable in tax law. Since we are not tax professionals or experts we cannot advise you if you will owe taxes on your particular auto insurance settlement situation but would advise you to contact the IRS or a tax accountant to figure out if any taxes will be owed.

Expert insurance information we can provide you with, either with a quote from an auto insurance specialist or learn about how to negotiate a settlement in our learning center.