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Are auto insurance settlements taxable?

Here's what you need to know...
  • If you receive a settlement payout from an auto accident involving an injury to you or damage to your vehicle, that settlement amount is typically not subject to taxes
  • Money received for repairs related to a damaged vehicle in an auto accident is generally not taxable
  • If you receive compensatory damages for any personal injuries that you sustain in an auto accident is not subject to tax
  • If you receive a settlement amount specifically for your lost wages, this amount of the settlement would be subject to your regular income tax
  • In the very rare event that you receive money through punitive damages against a defendant driver in a lawsuit regarding an auto accident, you would have to pay taxes on the punitive damages you receive

If you receive a payout from an insurance company as a result of being injured in an auto accident, you will likely not have to pay taxes on the settlement amount.

Typically, the settlement will cover damages to your vehicle or for medical expenses related to personal injuries you sustain.

If you have any doubt about whether you need to report money received from an insurance settlement, it is best to consult with a CPA or a tax preparation specialist.

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Receiving a Settlement from the Auto Insurance Company

After receiving a settlement check from an insurance company to settle a claim from an accident, you may be curious how this could affect your taxes.

The IRS deals with this specific scenario in 26 C.F.R 1 of the tax code. This part of the code also deals with judgments that you receive from a lawsuit related to your accident.

The IRS treats the several types of insurance settlements differently for the purposes of taxation. In most cases, the payout you receive from your auto insurance settlement will not be treated as regular income, which means you will not need to pay taxes on it.

The types of settlement that are not considered taxable are any amounts that you receive in order to repair damage to your vehicle as well as any amounts paid to you for physical injuries that you incurred in the accident.

However, if you receive any amount of money for lost wages in a settlement, then you must pay taxes on that amount in particular.

The reason that you are required to pay taxes on money that you receive in an auto insurance settlement for lost wages or income is that the payout is a replacement for money that you would have otherwise been required to pay taxes on.

You may have received a lump sum payment for a variety of different types of damages you sustained in an auto accident. In this case, you must still pay taxes on the portion of the settlement that is attributable to lost income or wages.

Not Receiving a Settlement for Your Claim

Even if you follow all of the right steps in filing a claim after an auto accident, this does not guarantee that you will receive a settlement for your claim. Under state law, every insurance company has a duty to negotiate claims in good faith.

If you are not able to get an acceptable response from your insurance company about the resolution of your claim from an auto accident, then you may consider contacting the insurance department of your state to file a complaint about your insurance company.

In addition, you may need to contact an attorney to negotiate with the auto insurance company on your behalf. An attorney will be able to protect your rights in negotiating with the auto insurance company.

The following are a couple things to keep in mind during the claims process:

  1. You should be retaining copies of all of your communications with the insurance company as well as all documents related to your claim.
  2. Be sure to follow through with all of their requests for information and respond in a timely fashion to inquiries from the claims adjuster. It is important to comply with all aspects of the investigation of your claim by the insurance company.

While no one wants to have to go through the process of filing a claim, you should make sure that you choose a reputable insurance company so that you can be confident that they will take care of you throughout the claims process.

When shopping around for an auto insurance company, you should ask around about the reputation of the company to make sure that it is reliable in terms of customer service and handling settlements from insurance claims.

Price is important when you are searching for insurance quotes, but it is certainly not the only factor that you must consider in selecting the right insurance company for you and your family.

Paying Taxes on a Settlement

In general, you will not have to pay taxes on money that you receive from an auto insurance settlement as long as the money you are paid is for damage to your vehicle or for medical injuries that you sustained.

However, if some of the insurance settlement that you receive is to replace lost wages or income, you would need to pay taxes on that amount only. Also, if you receive punitive damages from a lawsuit, this money would be subject to taxation.

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