Do I Have to Pay Taxes on a Car Accident Settlement?

Find Law Fast Team
Sep 9
2 min read

Winning a settlement after a car accident can feel like a huge relief — until you start worrying about taxes. “Will the IRS take a cut of my settlement?”

The answer: it depends on what the money is for. Some parts of a settlement are tax-free, while others may be taxable. Let’s break it down.

1. Medical Expense Compensation (Usually Not Taxed)

If your settlement reimburses you for medical bills related to the accident, that money is typically not taxable. The IRS views it as reimbursement for expenses, not income.

Exception: If you previously deducted those medical expenses on your taxes, you may need to pay back that deduction.

2. Pain and Suffering (Depends)

If pain and suffering damages stem directly from a physical injury or illness, they’re usually not taxed.
If they’re unrelated to physical injury (like emotional distress alone), the IRS may consider them taxable.

3. Lost Wages (Taxed)

If part of your settlement covers lost wages or income, that portion is taxable. The IRS treats it as if you had earned the money normally.

4. Punitive Damages (Taxed)

Punitive damages — awarded to punish the other driver, not to compensate you — are almost always taxable.

5. Interest (Taxed)

If your settlement accrues interest before payout, that interest is also considered taxable income.

6. How to Protect Yourself

Ask your attorney to clearly break down the settlement categories.
Keep records of medical expenses and deductions.
Talk to a tax professional before filing.

The Bottom Line

Not every dollar in a settlement is treated the same by the IRS. Medical reimbursements are usually tax-free, while lost wages, punitive damages, and interest are not.

👉 If you’ve received or expect to receive a car accident settlement and want clarity on taxes, fill out our quick questionnaire. FindLawFast will connect you with the guidance you need.

Disclaimer: This article is for general informational purposes only and should not be taken as legal, financial, or tax advice. Tax treatment of settlements varies depending on case details and IRS rules. Always consult a tax professional about your situation.