What's taxable in a car insurance claim settlement?

What isn't taxed in an auto settlement?

Property damage reimbursement and medical expense payments are not taxable because they are compensating you for a loss and returning you to where you were before that loss. If your car sustained $10,000 of damage during the crash or other accident, the $10,000 received from an insurer to fix or replace it isn't taxable. The same applies to any financial settlement covering related property damages separate from your car.

What if you were hurt during the accident? Any part of the payout that compensates you for medical treatment is also not taxable. The hospital care could include emergency services as well as ongoing treatment from a doctor. But you also can't deduct any of the medical costs as a personal expense on your tax forms.

"The IRS won't allow you to take a medical expense deduction for an amount that you receive in a tax-free settlement," Sue T. Meehan, a CPA and senior manager at Meehan Wealth Advisors, said.

What is taxed in an auto settlement?

Punitive damages, which are monetary compensation awarded to an injured party that goes beyond what is necessary to compensate you and serve as a punishment, are taxable. So are settlements for emotional distress (suffering not directly related to a physical injury, such as emotional trauma from being part of an accident where you were not injured) and lost wages.

There are "some exceptions for civil actions for wrongful death," Meehan said. These cases are complex and require the help of a lawyer or financial planner.

Steven Gursten, an attorney with Gursten, Koltonow, Gursten, Christensen & Raitt in Farmington Hills, Mich., which specializes in auto insurance law, agrees. He says the laws regarding car insurance settlements and taxes vary by state, and also depend in some cases on whether the state operates under no-fault car insurance laws, as does Michigan.

"Pain and suffering from a physical personal injury will not be taxable. Emotional injuries may be taxable. The key is whether there is a claimAn insurance claim is a request you make to your insurance company for coverage after your car is damaged or you have an accident. You can file a claim online, by phone, or in writing. first for personal physical injuries. Also, all emotional injuries that flow from a first physical injury will be considered compensatory and tax-free as well," said Gursten.

Are lost wages or legal fees paid by a car insurance settlement taxable?

If you were injured and can't work, settlements often cover lost wages or back pay, but this is treated and taxed the same as any income.

The laws stipulating what's taxable from a car insurance settlement also get fairly complex if you live in a no-fault state.

"The most general answer is that economic loss that is itemized will be taxable," said Gursten. But the rule will vary by state. Michigan serves as a good example of being very state-specific.

Under Michigan's no-fault insuranceAn auto insurance system where medical expenses are covered by your insurer regardless of fault. Personal injury protection (PIP) and medical payments (MedPay) are no-fault insurance coverages. law, people who are injured in a car accident first turn to their own insurance company. That insurance company is responsible for up to the first three years of lost wages. These lost wages are paid at 85% of what that person would have been making if they had not been injured and these are not taxable.

"But, after the first three years, if that same person will still be disabled, then a claim for excess economic loss can be made against the person who caused the car accident. This second claim for lost wages will be taxable as an excess economic claim," says Gursten.

Reimbursement for legal fees may also be considered taxable; however, tax laws change frequently, so it's important to consult with a tax professional to determine whether your reimbursement is taxable.

Review the most current settlement tax implication laws on the IRS website as well, especially if you do your own taxes.

FAQ: Car accident settlements and taxes

Do I need to report my car accident settlement on my taxes?

You do not need to report a car accident settlement on your taxes if it was for physical damage, injuries or medical bills. However, you do need to report any taxable income that resulted from the settlement, including punitive damages and emotional distress. You also need to report settlements for lost wages in the same way you would have reported that income.

Will I receive a 1099 for my settlement?

You may receive a 1099 for your settlement if it included taxable income, such as punitive damages and payments for emotional distress or lost wages. If nothing on your settlement was taxable, you may not receive a 1099. If you do, ensure that you follow the instructions for reporting it on your tax forms.

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