Question: My car was stolen. My car insurance company paid me only $2,000 (I believe the car was worth $3,000). Do I have to include the $2,000 in my gross income for taxes?   

Answer: No. You aren’t required to include the $2,000 you received as a car insurance settlement under your comprehensive insurance for your stolen vehicle as gross income on your taxes. This money was compensation for what you lost (your vehicle) and is meant to restore you to the position you were in before the loss of your vehicle. 

When a vehicle is damaged or stolen, and an auto insurance payment is made to either repair the vehicle or pay out actual cash value for it (as your insurer did for your stolen vehicle), the insurance company is only “making you whole” and not putting you in a better situation, so you aren’t taxed on this money as income. 

The basic rule is that if you don’t profit from your car insurance settlement, then you won’t be taxed on it.

This rule applies to medical payments as well. For example, say that instead of your car being stolen you were in an accident that caused you injury in addition to your car becoming a total loss. You then were paid out a car insurance claim settlement for medical claims; the money going to pay your medical bills would not be taxable income. Don’t try to deduct these medical expenses on your tax return though, since you were reimbursed for them.

If you receive payments from an insurance company for other items, then they may or may not be taxable according to state and federal laws. 

If you receive compensation for pain and suffering under another driver’s bodily injury liability coverage, then this typically won’t be taxed since it was derived from physical injury. But if you’re in a situation where you receive compensation for emotional suffering alone, normally this money is taxable. 

If you claim for the time you had to take off work due to your accident injury and receive compensation for lost wages, then this usually is considered taxable income, just as your regular wages would have been. 

Should your claim against another party, or insurer, get to court and you are awarded punitive damages, typically this money would be taxable.  Punitive damages are meant to deter bad behavior by punishing the guilty party, so it puts you in a better position and therefore is normally considered taxable income.

These are general guidelines for what can and cannot be taxed from a car insurance settlement. Tax laws vary and are complex, so for any complicated or specific tax questions we recommend that you contact a tax expert for advice.

When replacing a stolen vehicle, it’s an excellent time to make sure you are getting the cheapest car insurance rates possible by shopping around and double-checking your savings.

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Penny Gusner
Consumer Analyst/Insurance Expert

Penny has been working in the car insurance business for more than 10 years and has become an expert on procedures, rates, policies and claims. She has seen it all, and working with from its inception, she researches the routine and the bizarre with equal enthusiasm. She has three very active children and a husband with a zeal for quirky cars.