Taxation Of Car Accident Settlements: Are You Going To Owe The IRS?

Posted on: 8 June 2016

A car accident injury can be a very scary and emotional event to go through. If you have received a settlement from the insurer of the party at fault, there are some important things to keep in mind before spending the money. One of the first things you need to think about is the tax you may have to pay on the settlement amount. The claim on which you received the settlement will determine your tax liability, if any. The following is a breakdown of the different settlement claims:

Bodily Injury

Judgments for bodily injuries are not taxable under federal and state law. This includes any physical injuries you received in a car accident. No matter if you received your settlement in a court case or outside of court, you will not be responsible for any taxes on the money you receive. This judgment will also be inclusive of time lost from work, medical bills, pain, and suffering, along with attorney's fees.

Emotional Injury

Settlements for judgments based on emotional injury are taxable under the law. If the emotional injury cannot be proven to be a direct result of bodily injury, the judgment will be subject to taxation. Your emotional injuries incurred in a car accident can include post-traumatic stress disorder or other mental distress you have as a result of the accident.

Punitive Damages

Any punitive damages you receive in your car accident settlement are taxable. Punitive damages are awarded to punish a defendant for reckless or extremely harmful behavior that led to your injury. This can include damages for injuries sustained in a drunk driving accident, the blatant careless operation of a vehicle, or any other situation in which the judge sees fit to award punitive damages to you. You attorney may request that the judge separate the punitive from the compensatory damages, which would include money for income loss and medical bills. They do this to help simplify your taxes when it is time to pay. 


Any interest accrued on a settlement is taxable income. A judgment or settlement will begin to draw interest from the date that the complaint is filed until the defendant or insurance company pays the final amount of damages. For instance, if you file a lawsuit on the first of the month and the defendant pays the settlement on the 30th of the same month, you will receive interest payments for those 30 days.

Something that you need to remember is that the IRS has the power to challenge any taxation of a settlement. Be sure to use an experienced car accident attorney to help allocate your settlement to help reduce your tax liability as much as possible.