insurance payout from auto accident

[jsmith225]

I received a pay out from an auto insurance company from an accident in which I was injured.  If there is money left after all bills are paid, is that taxable as income?

[WendyS · Accepted solution]

@jsmith225 

I am sorry to hear of your auto accident. I sincerely hope you are recovering from your injury.

Typically, any settlement you receive for personal physical injuries or physical sickness is excluded from gross income.  An exception to this rule is if you had taken an itemized deduction for the medical expenses related to the injuries from the auto accident.

If you did not itemize and claim the medical expenses, the full amount of the settlement related to your physical injuries is not taxable.

For your convenience, I am including IRS Publication 4345 outlining the specifics of taxability of settlements.

https://www.irs.gov/pub/irs-pdf/p4345.pdf

[rschule1]

See Wendy S. She has provided a terrific reply. 

[Opus 17]

Any settlement for physical injury is never taxable, even if the amount is more than your medical expenses.

On the other hand, if part of the settlement is for punitive damages (to punish the other driver) or is for interest (because the judgement was paid late), that portion is taxable, even it if is less than your actual injuries.

However, if you received a previous tax benefit from the medical expenses, you have to pay tax on that part of the settlement since it is a reimbursement of a previous tax deduction.  This is called a "taxable recovery."  If you paid your out of pocket costs from an HSA or MSA (tax-free money) then that part of the settlement is a taxable recovery since you previously paid with tax-free money.  Or, if your expenses were large enough that you took an itemized tax deduction, then part of the settlement is taxable, but only to the extent the deduction was actually deductible.  (For example, if your bills were $10,000 and your gross income was $100,000, then you could only deduct $2500—the amount that your bills were more than 7.5% of your income.  That would mean that $2500 of the settlement is a taxable recovery but not the entire settlement, since the tax benefit of the deduction was only $2500.)

[Remami]

What if I paid for settlement ? Can the amount paid be used for tax writre-off? Thanks

[Remami]

What if I paid for settlement ? Can the amount paid be used for tax writre-off? Thanks

[RobertB4444]

If you paid out of pocket to settle out of court (or in court) for causing damage to someone but without admitting wrongdoing the amount of settlement that you paid is never deductible.