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, you won’t be taxed.
Must I 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 the law excludes tax payments on damages (other than punitive) for personal injuries or 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” also applies to medical payments.
For example, say that instead of your car being stolen, you were in an accident that caused you injury, and your car became a total loss. If you 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, 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, 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 is typically taxable.
Suppose you claim for the time you had to take off work due to your accident injury and receive compensation for lost wages. This is usually 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 deter bad behavior by punishing the guilty party, putting you in a better position and is usually 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.
Check out our detailed guide: Is car insurance tax deductible?
Sources
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.
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