The goal of getting a settlement or going to trial to prove your claims after an accident is to get proper compensation for any physical damage, the pain you suffered, and damage made to your property. Therefore, the money you get after the process is not considered income, which means that you don’t need to pay taxes for it.

However, things can be more complex when you receive compensation for different aspects, like medical treatment, pain, lost wages, repair of your property, and more. In case you are dealing with a settlement after a car accident, you should learn more about tax deductibles and where they apply.

When it comes to the United States, the rules are clear, and compensation is not taxable. However, there are exceptions to this rule, and that is mostly related to cases where people increased their wealth after accident insurance claims. We are going to analyze more of this topic below.

Property Insurance Claims


This is the most common type of claim where you will be asking for compensation so you can repair or replace the property that got damaged in an accident. For example, getting a settlement after a car collision should cover the expenses for the repair of the vehicle. The reason why you don’t need to pay taxes, in this case, is related to the fact that you are not gaining additional value to your property.

However, there are some exceptions to this rule. In case you receive more money than is required for the repair of your car or property, you will need to pay taxes for that extra value that overcomes the estimated value required for bringing the property into its original condition.

Medical Claims

We all know how expensive medical treatments can be. Still, you don’t need to worry if you were in the hospital after an accident that you were not responsible for. The other side will have to pay for your treatment.

Also, this amount is not the subject of any taxes. Moreover, eve n if you paid for some expenses on your own, and you receive that money after the trial, there is no reason to worry about any taxes for that amount.

Disability Claims

This is the part where things could be more complicated since there are some situations where you might need to pay taxes. If there is a tragic event, and someone dies in the accident, the money that the family of that person will receive is not taxable. On the other side, if you get any extra value as part of the insurance, like the compensation for your mental condition or pain you suffered, the IRS will, in most cases, demand a tax payment.

The reason for that is that you will continue receiving an income that will increase your wealth. Even if you get disabled, and the other side will now have to pay you for lost wages and lost the ability to work, you will need to pay the same taxes as when you were getting regular wages.

What About Lawsuits?


In case you have had issues with creating the right settlement for insurance claims since the other side won’t accept your offer, that means that you should transfer the case to the court. Still, the rules remain almost the same. Therefore, all money that you get for compensations related to medical bills and repairs won’t be taxed.

Moreover, the biggest advantage of a trial is that you can get much higher compensation. In case you win on trial and the judge decides that the other side has to pay you additional value for punitive damages, pain, and suffering, emotional distress, and lost wages, all of these compensations are subject to taxes.

What About Claims That Include Different Categories?

It can be tricky when you receive a total amount that represents compensation for different types of claims, such as medical bills, pain, repair, and more. If you don’t have enough experience and knowledge, calculating the amount you need to pay for taxes can be challenging. That is the reason to always consider hiring an expert who will help you with that part.

The first thing to do is to separate different categories that provided you with the compensation. When it comes to the money you receive for treatments, it will be easy to deduct that amount since there will be bills included in the amount. However, all of the money you get for pain and suffering have to be taxed unless it leads to long-term disabilities.

The money you get for pain and suffering is even more complex when it comes to determining whether you have to pay taxes for it. For example, the trauma, anxiety, anger, and other emotions that could be added to the claim and increase the value will all be subject to taxes. On the other side, getting an injury that will lead to chronic pain and other long-term issues is not going to be taxed.

That is the reason why the proper calculation is necessary. You can simply divide different categories and the amount of money you got for each one of them. After that, it will be much easier to determine the amount of money that you need to pay. For example, if you got $100,000 for medical expenses, pain, stress, repairs, and lost wages, only the part related to wages has to be taxed.

The Bottom Line


As you can see, the whole point about excises on insurance claims is related to the fact of whether you increased your wealth and received profit through it. For instance, the reason why you will need to pay taxes for the money received as compensation for lost wages is the fact that you would earn that money anyway.

Furthermore, the same is related to punitive damages, where victims can get a lot of money. For example, if there was an intention or clear expression of unconcern, the judge might decide to significantly increase the total amount you get. In most states, you will need to fill out a form and pay for that extra amount.