Do I Pay Taxes On An Auto Insurance Settlement?


Money received from an auto insurance settlement is not taxable if it is used to restore a person’s life back to the way it was prior to the accident.

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One of the worst scenarios that can happen when driving a car is being involved in an accident, regardless of who is at fault. After the initial shock subsides, thoughts race through a person’s head, such as possible loss of wages due to injury and the cost of repair or replacement of their car. After the feeling of relief from receiving the settlement check abates, dread sets in. Are taxes due on the money received from the auto insurance settlement?

Uncle Sam Only Wants Some Of The Settlement Check

The IRS only requires that a person pay taxes on the money received from an auto insurance settlement for loss of wages. These are funds that would have been taxed whether or not an accident occurred. Also, if the payment received for damages to the vehicle exceeds what the car was originally worth when purchased, the difference between the damages and the original amount is taxable. However, this is a rarity in auto insurance settlements, even if the vehicle is totaled. Finally, a person must pay taxes on any money that is paid for by the auto insurance settlement, but would normally be reimbursed. It is important to note that a person cannot claim any medical expenses related to the accident on their prior year’s tax return.

Settlement Checks Can Restore Life

Any monies from an auto insurance settlement that are used to restore a person to the state they were in prior to the accident are not taxable. These types of funds include monies used to pay hospital bills, household expenses, and auto repairs. The general rule is that if the settlement received for a car accident is due to physical injury, than those monies are not taxable because they are making the person whole again. However, any funds received for emotional damage are taxable.

Related posts:

  1. How Can I Negotiate With An Auto Insurance Settlement?
  2. What is the Definition of Collision Coverage For Auto Insurance?
  3. How Does An Auto Insurance Settlement Work?
  4. How Do Car Insurance Limits Affect Me When I File A Claim?
  5. Can Medical Bills Be Paid Through Car Insurance?

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