Are Auto Insurance Settlements Taxable

January 27, 2012

When you are making an auto insurance settlements claim, you may be left wondering whether any money you receive is taxable. Anything which is taxable needs to be written down when you fill in your returns at the end of the financial year, and missing any of these items can cause a serious problem for you. In most cases, your insurer will deduct a small amount for tax purposes if necessary, and you do not usually worry about the rest, but with such a large amount, leaving it in the hands of your insurers is not always a very good idea.

Are Settlements Taxable?

The answer to this question is both yes and no. Parts of your claim may be taxable. It depends very much upon what exactly you claim for, and how this is registered with the insurance company. A basic claim for repair work will not be taxable, however a long claim which includes damages which are not required to pay bills may be taxable. An item which is taxable may be negotiated by your insurer so it ceases to be such, but this will probably result in you having to pay them an extra fee.

Settlements Which are not Taxable

Some parts of the settlement will not be considered as income by the IRS. If you have been injured in your car accident, or you need to make payment to repair your car, or even get a new one, then this will not be considered to be taxable. Money which is paid in compensation for these costs will not have to be counted as tax. Neither will any money you receive as direct compensation for this injury. You may, for example, spend a long time on paid medication, which is paid for by an insurance company settlement. But this money, which may amount to a lot, is not taxable, and you will not have to put it down on your claims form.

Settlements Which are Taxable

This does not mean that no parts of your award are liable for tax. This is where it becomes complicated, particularly for the person who suffered the injury. In awarding of damages, any payments which cover wages you would have earned had you not been incapacitated, compensation for emotional distress, or punitive damages awarded by a court, all count as income, or personal income settlement. This is taxable, and must be entered into your tax form when you next submit.

Working Out Taxable Payments

This situation seems very difficult to work out. Some parts of the payment are non-taxable, and other parts are a taxable insurance settlement. The difference seems to set out as working out which parts of a settlement you have earned (by being injured), and which parts are other payments (such as emotional distress). If you had been working, that would have been taxed, as usual, and so payments for lost wages might fairly be taxed. This is not true for medical payments, which you do not usually declare on your form.

Related Questions and Answers

Are Bodily Injury Insurance Settlements Taxable to the IRS?

As a rule, you will find car insurance settlements to be taxable does not apply if bodily injury is involved. There is only one special case where something might be considered taxable, and that is if the settlement not only fixes but improves the vehicle's value.  At that time, the IRS may consider it taxable because the value of something you own increases. Even then, the IRS usually doesn't get involved, so for all intents and purposes, car insurance settlements, whether bodily or property, are usually not bothered by the Internal Revenue Service. Bodily injury settlements are most assuredly not taxable.