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Car accident insurance settlements are generally not taxable, although there are certain exceptions, according to the Internal Revenue Service (IRS).
Car insurance settlement for pain and suffering: taxes vary
If your pain and suffering is the result of a physical injury, your award is not taxable. However, if your pain and suffering is classified as emotional distress, it is taxable, and you must pay taxes on the amount paid to your attorney.
If, for example, you were not injured in an auto accident, but you developed a fear of driving as a result, compensation for your anxiety disorder would be taxable. However, compensation for emotional distress resulting from a physical injury is tax-exempt.
If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.
However, there are instances where auto accident compensation is taxable. It depends on how your settlement is structured. The negotiation between you and the driver who injured you should include tax considerations so you can keep as much of your settlement as possible.
