Are car insurance payments taxable?

If by car insurance payments, you mean claim settlements against your car insurance, these are commonly not taxable.

Basically, what you are receiving from car insurance would be payments for:

• Repairing or replacing your car
• Medical expenses if you need medical treatment or rehabilitation treatment due to a car-related injury
• Replacement services (housekeeping, child care, elderly care). This is for things you used to do but cannot do now due to your injury

These mean that the payments have the purpose of compensating you for a financial loss (restoring you to your financial standing before the incident). Hence, there is no income - and there is no taxable event. However, this also means that you are not allowed to deduct the loss from your income tax because there was no actual loss (the insurance compensated it already).

For instance, if your car was involved in an accident and you needed to spend $1,000 to have it repaired and the insurance paid you $800 (less deductible of $200). Your loss of $1,000 is being compensated for by the insurance (with the $200 acting as your share of the claim).

Taxable Claims Payments

There are, however, instances when you need to report insurance settlements as income and will thus be taxable. This is when the settlement from the insurance company was actually more than what you needed to pay for in order to repair the damage. The amount you will be reporting as income would be the excess (or "profit") you can due to the claimable event.

The same goes for insurance settlements for bodily injuries - medical expenses as well as expenses for rehabilitation.

Compliance to IRS

Even though these claims settlements are generally not taxable, you should report what you receive to the IRS. You just need to report your claims payment as income.

Ask for Professional Advice

The best thing you can do is to ask for a professional's advice regarding your particular situation. This is particularly true if you have received punitive damages as a result of a lawsuit. The IRS rules may differ for this matter.

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