YOU ASK:

Do you have to pay taxes on money you received in a car accident settlement?

WE ANSWER:

Generally, no. The claims settlement you receive from the insurance company after an accident is meant to bring you back to your financial statue before the accident happened.

Insurance is not meant to earn income for the person insured, it is there to protect one from financial losses due to unexpected events in one's life - such as a car accident.

For instance, you "lost" $3,000 as a result of an accident that damaged you car and you needed to have your car repaired. When the insurance company gives you the $3,000 (less the deductible), this is not income. Rather, it is just giving you back the $3,000 you lost.

Claims settlements that pay for:

  • repairs on a damaged car
  • replacement of a car that has been totally wrecked
  • hospital bills for injuries sustained during the accident
  • replacement services such as household assistance or elderly care
  • compensation for pain and suffering caused by bodily injuries

are, as a rule, not considered income. What may be considered taxable is if the claims payment exceeded the actual expenses - then you will have to declare the excess as taxable income.

You need to report your claims check, though, but this will not be included in your taxable income. Also, if you deducted any medical expenses in your previous tax declaration, you will have to "re-declare" these medical expenses since you already received compensation for these.

Now, your situation may be unique and we advise you to consult an accountant or tax specialist to ensure that you fully comply with what the IRS requires from you come tax-reporting time. This is to avoid any penalties that may be meted out for non-compliance.

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