The money you receive from an auto accident injury claim or another personal injury claim usually is not taxable, because it is considered compensation for a loss.
What does the word damages mean?
When we talk about damages, we are referring to the money you receive either by settlement or court trial to compensation you for your loss. So, if a person runs a red light, hits your car, and you are hurt, you would receive damages or payment for your injury. You might get this money by a settlement before trial or because of a court judgment. The money usually comes from the liability insurance company.
Is a personal injury settlement taxed?
Will the government tax your award? In your typical personal injury case, the answer is no. Compensation includes money for physical injury, medical expenses, emotional distress, pain, property damages economic loss and disability. This is not considered income because it is compensation for a loss. The accident brings you economically into the negative numbers, and the award, in theory, just brings you back to zero. If there is no income, then there is no income tax. The tax code excludes from its definition of income any amount of money that you received from your case because of personal injuries. So, if there is a physical injury from the accident, then the amount may reportable but in general it is not considered taxable, under section 104(a)(2). https://www.law.cornell.edu/uscode/text/26/104
What about other types of claims?
If your claim is for punitive damages, or if the claim does not include a physical injury, then it probably will be taxable. The code excludes from the definition of income any amount of money you received from your tort as a result of personal injuries. So, if there is a physical injury from the accident, then the amount may be reportable but in general it is not considered taxable.
How can I be sure?
You should always consult with a professional tax expert for details as it applies to your personal injury case.