What are the tax implications on an auto insurance settlement due to medical bills and pain and suffering?

[MichelleT · Accepted solution]

In general, any settlement you received for personal or physical injury or sickness is NOT taxable.  

Most other [legal] settlements, such as for back pay and punitive damages, are taxable.  

In the case of property (like your car) , if the settlement merely restores your original value, it’s not taxable, but if it enriches you beyond where you were before, it is taxable. 

If you received a 1099 miscl for this lawsuit settlement

This is how you should enter it: 

1. Open (continue) your return in TurboTax if you don't already have it open.
2. In your program, search for 1099-MISC (upper- or lower-case, with or without the dash) and then click the "Jump to" link in the search results.
3. Answer Yes to the question Did you get a 1099-MISC? (even if you didn't get one).
4. Complete the top part and then enter the award amount or previously-deducted medical expenses in Box 3 Other Income.
5. Fill out any other boxes from your paper 1099-MISC (if you have one), then click Continue.
6. Select This was money from a lawsuit settlement on the Does one of these uncommon situations apply? screen and then answer the back wages question before clicking Continue.

[BobinCT]

But the part of the settlement for medical bills is taxable to the extent that you deducted those bills in prior years.