Receiving a compensation check from your auto insurance provider due to a car accident can give you the relief, financial stability, and peace of mind you need to finally move on. However, at tax time, you may be wondering whether or not you need to pay taxes on your settlement, depending on the types of damages involved.
But what types of damage exist? These are the main categories:
Taxes depend on the type of auto insurance
settlement Whether or not you have to pay taxes on your auto insurance settlement depends on the types of damages involved. But what types of damage exist? These are the main categories:
- Medical bills. Payments to cover medical costs (hospital stays, doctor visits, surgeries, rehabilitation, medications, etc.) that are reasonable and necessary to treat physical injuries sustained as a result of the accident.
- Pain and suffering. Compensation for pain and suffering you experienced as a result of an accident, such as physical pain, indignity, mental suffering, disfigurement, loss of quality of life, and more.
- Property damage. Payments to cover the cost of replacing property that was lost or damaged in the accident, commonly vehicles.
- Lost income. Replacement of wages that were lost as a result of the accident.
- punitive damages. Assessed damages beyond the amount required to punish a defendant for negligence.
Insurance is meant to compensate for your losses, helping you get back on your feet after an incident. Taxes come into play when the government considers that you are receiving an additional profit.
For example, let’s say your $15,000 car is lost in an accident and you receive $14,500 ($15,000 minus your $500 deductible) to cover the loss and replace the car. The amount you receive would NOT be subject to tax. However, if you received $14,500 in damages, that payment would be taxable.
Taxable Auto Insurance
Settlements So, what insurance settlements are taxable? These are the main types:
- emotional stress Settlements that pay for damages related to emotional distress are taxable when the condition does not stem from a physical injury caused by the accident. For example, if you were hit from behind, broke your leg, and experienced heightened anxiety as a result, your emotional distress payments would not be taxable. However, if you suffered no physical injuries in the accident, but suffered anxiety, the emotional distress settlement would be taxable.
- Compensation for damages. If you receive a payment of damages, the funds are taxable as part of your income, even if they are received as part of a personal injury case. Punitive damages can be awarded for misconduct and are considered punishment for the person or organization responsible for your injuries.
Tax-Free Auto Insurance
Settlements Here are the types of Rebuilt auto insurance settlements that are not normally taxable.
- Lost wages due to physical injuries. If you are involved in a car accident that causes you to miss work and lose your regular paycheck, compensation can help you recover those lost wages. If wages were lost due to a personal physical injury, you can exclude them from your taxes. You can also claim future lost earnings if you can no longer do the same type of work you had before the accident.
- Medical bills. If you were physically injured in a car accident and received a settlement to cover medical expenses, that amount is tax-free.
- Repair or replacement of property. If your car is damaged in an accident, the settlement to repair or replace it won’t be taxable as long as it doesn’t exceed your adjusted basis in the car, which is generally how much you paid for it and the cost of any improvements you made. You can repair or replace your car and you don’t have to worry about the tax bill.
- Pain and suffering. If you receive compensation for pain and suffering that is related to a physical injury, that part of your settlement will be exempt under the same law that exempts medical bills. These funds are intended to help compensate for your loss and return it to its pre-accident condition.
How to Reduce Your Taxes on Car
Insurance Settlements If you want to minimize your taxes on car insurance settlements, it’s important to make sure all of your payments are categorized correctly. Keep good records of receipts and payments for everything related to your injuries and/or property damage.
Remember, more than just your car can be injured in an accident. Make a note of any property you need or have replaced because of the accident and its value.
Also, if you expect a large payout for a physical injury, a structured settlement may be your most affordable option. Structured payments are paid over years, through annuity payments, and are completely tax-excluded.
Having your car insured is a legal mandate, but it is also invaluable support when suffering an incident on the street.
Contact us and start saving money on your auto insurance.