If you have car insurance and you’re in an accident, an insurer will pay out a settlement to help you repair or replace your vehicles. But a question that often come us is whether the payout is taxable
The short answer is no. When a vehicle is damaged or stolen, and an auto insurance payment is made to either repair the vehicle or pay out its actual cash value, 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.
Am I required to report a settlement as income on my taxes?
Say your car was stolen and the insurance company paid your $2,000, do you have to include that amount in your gross income for taxes?
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.
According to the legal site NOLO.com, the Internal Revenue Service (IRS) regulation for settlements and judgments is in 26 C.F.R section 1.104-1(c).
It says that the law excludes tax payments on damages (other than punitive) on account of personal physical injuries or physical sickness. Damages for emotional distress attributable to a physical injury or physical sickness also are excluded from income tax payments.
Are medical payments taxable?
An auto insurance payment to “make you whole” 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. If you then were paid out a car insurance claim settlement for medical claims and the money went to pay your medical bills, it would not be taxable income.
An important caveat: 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.
Will I be taxed on compensation for emotional suffering?
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, this money typically 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.
Will I be taxed on lawsuit claims?
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, but contact a Certified Public Accountant, or CPA, for specific tax questions.
- NOLO. “Do I Need to Pay Tax on a Car Accident Settlement or Judgment?” Accessed June 2022.
- AICPA. “Certified Public Accountant (CPA)” Accessed June 2022.
– Penny Gusner contributed to this story.