Are car insurance settlements subject to income tax?

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In a nutshell...
  • Most personal injury settlements will fall under a section of the IRS income tax law which prevents taxation
  • Attorney fees are often paid on the gross amount and sometimes do not include expenses
  • Understanding how income and auto insurance settlements work is fundamental

Income tax laws are very complicated although most proceeds from car insurance claims are not categorized as taxable income. Any funds received from a car insurance company as part of an auto insurance claim for vehicle repairs are not taxable.

Of course, you always want to check with your tax accountant in regards to funds received from an auto insurance settlement, but most insurance claims will not be subject to IRS income tax.

Taxable income is precisely that – income – and car insurance claims submitted to repair your vehicle to the same condition before an accident occurred are defined as “restoration of capital” and not subject to IRS income tax.

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Is money received from a personal injury insurance settlement taxable?

This is where you need the help of a tax specialist as for whether or not personal injury insurance settlements are considered taxable income will depend on the nature and details of the solution.

Most personal injury settlements will fall under a section of the IRS income tax law which prevents taxation for monies received from a secret injury settlement.

However, should your settlement also involve monies for things other than personal injury damages then they may very well be subject to income tax?

If you are in the process of a personal injury settlement then you probably have an attorney, so you need to consult with your legal representative to understand the income tax implications of any secret injury insurance settlement.

It’s essential not to solely rely on the advice of legal counsel as he/she may not be an income tax specialist. They may be very good at winning damages for your injury case, but when it comes to the IRS, you need a specialist in that field.

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What is taxable income?

Any settlement from an auto insurance company will include money. This could be cash to pay for vehicles repairs, compensate for personal injuries, reimbursement of lost wages or more.

When it comes to defining what taxable income is in auto insurance settlements, there is a pretty clear line of what is subject to taxation.

Any monies awarded for medical expenses or vehicle repair are not subject to tax and anything else probably is. Funds for items like emotional distress or lost wages are subject to income tax.

How much car insurance do I need?

Understanding how income and auto insurance settlements work is fundamental. Most any personal injury claim will be handled by a car accident attorney where a standard fee is 30 percent or 1/3 of the settlement proceeds.

Attorney fees are often paid on the gross amount and sometimes do not include expenses so your ultimate net can be significantly reduced when you factor the total legal cost and income tax liability.

It is not uncommon for the injured party to end up netting only 40 percent or 50 percent of the actual settlement at the end of the day.

Should I use a personal injury lawyer?

If you have been injured in a car accident, then you are most likely entitled to some compensation from your auto insurance company or the party at fault.

The amount of money will depend on many variables including:

  • Who was at fault
  • What kind of injuries were suffered – physical, injury, financial, etc.
  • The severity of the injuries
  • Where the accident happened

Whether or not you understand auto insurance coverage, it’s always wise to seek the assistance of a personal injury lawyer or another legal professional who understands how auto insurance claims work.

While you do want a lawyer with a solid track record assisting you it’s most important you find one who will always have your best interest in mind and not his checkbook.

The value of any car insurance policy is in the details of coverage, and many drivers often find themselves uninsured or underinsured for personal injuries in a car accident.

You must understand the different types of car insurance and how coverage works before buying a policy.

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