Do we have to pay taxes on a "pain and suffering" award from my auto insurance for my wife, who was injured in a hit-and-run accident in 2015?

[Minerva-s-Owl]

Our health insurance covered most of the medical bills. Our auto insurance paid their maximum of $10,000 directly to our health insurance for medical bills. We took deductions for co-pays in our 2015 and 2016 tax returns.

[Coleen3]

I am quoting multiple sources that discuss this topic

1) It depends on your facts and circumstances. If your lawsuit was for “personal physical injuries or physical sickness,” then generally the settlement proceeds are not included in your income. An exception applies when some of the proceeds are paid to reimburse you for medical expenses that you deducted on your tax return. If the proceeds were not for personal injuries, then some of it may be taxable to you.

https://www.bankrate.com/finance/taxes/is-settlement-proceed-taxable.aspx

2)"Physical" is still the pivotal word when it comes to damages for emotional issues. If your pain and suffering is the result of injury or illness that gave rise to your lawsuit, the damages aren’t taxable. If your lawsuit relates to something other than personal injury, such as discrimination, defamation or an employment issue, the IRS will tax you on the money at the percentage rate determined by the tax bracket you fall into when adding in your other income. You’ll also have to pay Social Security and Medicare taxes on the damages. If you’re negotiating a settlement with the party you’ve sued, talk to your lawyer before you sign an agreement if your case involves both physical and nonphysical claims. You’ll want to make sure that if your pain and suffering is related to physical injuries or illness, this is clearly stated.

https://pocketsense.com/tax-implications-pain-suffering-settlements-11404881.html

[Minerva-s-Owl]

This was not a lawsuit. My wife was a pedestrian sideswiped by a car driving in a bicycle lane, resulting in surgeries and numerous medical visits. Our auto insurance made the "pain and suffering" payments to us after the maximum $10,000 for medical had been sent to the health insurance company.

[Coleen3]

Please read the entire link:. There are a lot of things involved.: <a rel="nofollow" target="_blank" href="https://www.insurance.com/auto-insurance/life-events/are-car-insurance-settlements-taxable.html">htt...>

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.

[Minerva-s-Owl]

Since this was a hit-and-run, our auto insurance put it in the "uninsured driver" category. Of course there was emotional distress, but I think the settlement was for physical injury, which still has effects. From the links you supply, it seems I will at least have to amend the last two tax returns to account for the co-pays. Thanks for the help!

[Coleen3]

My pleasure.