If you’ve been in a car accident and experienced physical injuries, lost income, or emotional distress, you may be able to sue the at-fault driver’s car insurance company. Often, car insurance companies will settle out of court, offering you a settlement intended to cover those losses. If you agree to the settlement, you’ll receive that payment, but is money from a car accident settlement taxable? The answer depends on the type of settlement you received.
In many cases, car accident settlements are not taxed.
If you received a settlement in compensation for physical injuries, pain and suffering, emotional distress caused by an injury, or wages lost because of your injuries, you typically don’t have to pay taxes on that money.
You might also receive a settlement that includes money for damages your car sustained. The money might be intended for the cost of fixing or repairing your vehicle. This type of settlement isn’t taxable, either. The same is true of a settlement for other types of property damage, such as if a vehicle hit and damaged your home or garage.
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While most car accident settlements aren’t taxable, there are a few situations where you will be responsible for paying taxes on the money you receive.
When you receive a settlement that includes money for emotional distress resulting from the accident, the exact cause of that emotional distress will determine whether those funds are taxable. The IRS states that emotional distress caused by physical injury you sustained in the accident isn’t taxable. But emotional distress that simply results from your experience in the accident could be taxable. Discuss this with your lawyer, since the way that your settlement is filed and the attribution of the emotional distress will impact your tax liability.
Other expenses that aren’t caused by physical injuries you sustained can also be taxable. For example, a settlement for any harm to your reputation would be taxable.
In most cases, any loss of income you experience will result from an injury that occurred in the accident. However, if you have a somewhat rare situation where your loss of income wasn’t caused by injury, any settlement for that income loss would be taxable.
Car accident settlements are complex, but your lawyer can help you understand the process and any tax implications. Ask your lawyer any questions you have about the taxes that you’ll owe and how to report the settlement to the IRS. An accountant can also help you file your taxes and ensure that you’re reporting your settlement accurately.
A quality car insurance policy can also provide you with valuable protection if you’re ever in an accident. You can get free online car insurance quotes today to start exploring policies so you can find the best price on the best coverage.
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A home warranty offers many benefits, but it’s important to be realistic about the drawbacks, too. Buying a home warranty can help you potentially save money if a major appliance or system needs to be repaired or replaced. But you’ll need to weigh the warranty costs against the potential cost of a new appliance to make sure that it’s worth buying the warranty. If you decide not to buy a warranty, it’s a good idea to build up your emergency savings so you’re prepared for any appliance or home system costs that you encounter.
Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.
