Are auto accident insurance proceeds taxable?

After a vehicle accident, you may receive compensation. If this happens, one of your next actions should be to discover whether you received taxable insurance proceeds. The Internal Revenue Service (IRS) has specific guidelines in place to determine which insurance proceeds are taxable.

The IRS considers each type of payment to have specific purposes, so the individual intended function of payments is important. Some specific categories are considered to be financial gain, which makes them taxable.

But keep in mind that tax laws vary by state, so make sure to speak with a tax professional before filing your taxes.

Which insurance proceeds are taxable?

There are multiple types of payments you may be eligible for after filing an insurance claim for an auto accident. These include:

• Property damage
• Medical bills
• Lost income and future lost income
• Punitive damages
• Reimbursement for pain and suffering

When are auto accident insurance proceeds taxable from an incident that occurred while out on the road?Usually, the IRS considers payments that provide financial gain as taxable.

Overall, automobile insurance is meant to indemnify you against losses caused by a vehicle crash. Sometimes, though, payments are intended for and used for other purposes.

Lost Wages

Because compensation for lost income and future lost income is intended to replace wages, which would be taxable, these types of payments are usually taxed.

Pain and Suffering

These types of punitive damages, sometimes awarded in the case of severe, long-term, and life-changing injuries, are taxable in the eyes and regulations of the IRS. Federal tax law specifies when compensation for injuries is taxable, so you should consult with a certified public accountant to determine if your particular circumstances fall into the taxable category.

Emotional Distress

If courts deem the at-fault driver to have been careless or malicious, the IRS will generally tax any awards given for emotional distress stemming from a vehicle crash. General medical expenses do not include this category, thus making it financial gain rather than compensation.

Free Auto Insurance Comparison

Enter your ZIP code below to view companies that have cheap auto insurance rates.

 Secured with SHA-256 Encryption

Which insurance proceeds are not taxable?

There are several instances where insurance proceeds are not taxed because they are designed to repay the car insurance policyholder for their loss rather than provide financial gain.

Vehicle Damages

If your vehicle is damaged in a road accident, the compensation you receive to help repair or replace your vehicle is generally not taxed.

Medical Expenses

If you are injured in a vehicle accident, compensation to pay for medical costs is usually not considered taxable. The IRS also does not tax proceeds paid for future medical expenses and prescriptions you need due to injuries incurred in an accident. Often there is a three-year limit on payments awarded for future medical costs.

What if my settlement is mixed?

Sometimes insurance companies pay mixed proceeds that include both non-taxed amounts, such as payments for vehicle damage and taxable amounts, such as for pain and suffering or lost income. If this happens in your case, you should consult a tax professional.

Because laws vary from state to state and also change, an industry authority will be up-to-date on all current federal and local regulations. Tax specialists also know how to break down the amounts paid for each factor considered in the payment. They can talk with you and help determine how much of your payment is taxable.

You can make this process efficient and easier by keeping all medical receipts and expense records. These documents offer proof in writing of your costs incurred due to injuries received in a vehicle accident.

Lawsuits

Even people with insurance may have expenses related to medical care or property loss that their policies do not cover. In these cases, sometimes people file litigation in courts to seek further compensation.

Payments received in a lawsuit are called judgments or settlements. These are considered the same thing in U.S. tax laws. Plaintiffs can seek damages for indemnity as well as for pain and suffering or replace lost wages. Lawyers use a specific tool to help plaintiffs determine the amounts they seek.

Multipliers

A multiplier is a number devised to render the total amount of a settlement request. For example, a plaintiff’s recorded medical expenses might be multiplied by five to determine the amount demanded in court. Often, lawyers for defendants will counter with lower multipliers. In serious cases, sometimes courts use multipliers greater than five.

If you use your settlement to pay for car repairs, this type of payment is usually not taxable. Likewise, proceeds used for medical bills are also generally not taxed. Insurance proceeds and court-awarded settlements are treated the same for tax purposes.

Free Auto Insurance Comparison

Enter your ZIP code below to view companies that have cheap auto insurance rates.

 Secured with SHA-256 Encryption

Tax Write-Offs for Losses

In some cases, you may be able to write off losses if your vehicle is involved in a crash. For example, if you own a classic automobile and it is totaled in an accident, you can include this loss as a deductible on your taxes, as long as you did not cause the crash. 

While insurance proceeds for car repairs are not taxable, the payment does reduce the amount you can write off. If your loss is $6,000 and insurance pays you $4,000, you can only claim $2,000 as a deductible.

The Bottom Line on Taxable Auto Accident Insurance Proceeds

In most cases, income is considered taxable if it provides financial gain. This includes insurance payments for pain and suffering, other punitive damages, and lost wages.

You probably will not have to pay taxes on auto accident insurance proceeds paid for vehicle repairs or replacement or for covering medical expenses for as long as three years after the accident.

Tax laws vary by state, so you should consult a tax professional and possibly a CPA if you receive an insurance payment after a vehicle accident. Professionals are up to date on the latest tax laws and can guide you through the process of determining how much, if any, of your insurance proceeds are taxable.

Free Auto Insurance Comparison

Enter your ZIP code below to view companies that have cheap auto insurance rates.

 Secured with SHA-256 Encryption