Just because the payer issues a 1099 form doesn't automatically mean the money is taxable, but it does mean you will have to deal with the situation on your tax return.
In general, insurance settlements are only taxable if they are more than your actual damages. Specifically:
- Amounts for medical damages are not taxable.
- Amounts for pain and suffering are not taxable if the pain and suffering are due to physical injury, but are taxable if the pain and suffering is due to non-physical injuries.
- Amounts for vehicle damage are only taxable if the payment is more than the damage/cost to repair, plus any other costs (like rental reimbursement).
- In the case of a car that is totaled, the settlement is taxable if it is more than your cost basis. Cost basis is generally what you originally paid for the car. However, if you inherited the car or recieved it as a gift, cost basis is more complicated to determine. If you used the car for business, the cost basis must be adjusted to account for the business use.
- Reimbursement for attorney fees, punitive damages, or interest on late payments is taxable.
- Additionally, if you previously took any deductions for this accident (like, the car was used in business and you wrote off the car on your schedule C, or you deducted medical expenses as itemized deductions on schedule A), then part of the settlement may constitute a taxable recovery (reimbursement of a previous deduction) even if it would not normally be taxable.
Gather your documents proving injury, cost, and so on, and work up a table, list or spreadsheet showing the settlement, your costs, and calculating whether any part is taxable. Then, if you get a 1099-K, we can help you navigate the program at tax time so that only the taxable part (if any) is reported. (I'm not going to go into that detail now, since the way the program handles 1099s might be changed between tax seasons.)
