Are Car Accident Settlements Taxable?

Generally no. Money you receive because of a physical injury from a car accident, including the parts for medical bills, pain and lost wages, is excluded from federal income under 26 U.S.C. 104(a)(2). The main exceptions are interest, punitive damages and repayment of medical costs you already deducted. Have a tax professional review your settlement before you file.

Is a car accident settlement taxable income?

Federal law starts by counting all income from any source (26 U.S.C. 61) and then carves out exceptions. Section 104(a)(2) is the one that matters after a crash. It excludes damages, other than punitive damages, received on account of personal physical injuries or physical sickness, whether by lawsuit or by agreement and whether paid as a lump sum or in periodic payments.

The Treasury regulation adds that emotional distress is not a physical injury by itself, but damages for emotional distress that come from a physical injury are excluded too (26 CFR 1.104-1(c)). In plain terms: if you were physically hurt in the crash, the compensation for that injury and its effects is generally not taxed.

IRS Publication 4345 puts it the same way. If you did not deduct the related medical expenses in earlier years, the full amount for physical injury is nontaxable and you do not include it in income.

Are lost wages in an injury settlement taxable?

Usually not, when the lost wages flow from a physical injury. The IRS page on tax implications of settlements and judgments cites Revenue Ruling 85-97: the entire amount received in settlement of a suit for personal injuries from an accident, including the part for lost wages, is excludable.

This is different from an employment case. In a lawsuit over firing or discrimination, back pay is taxable wages, as Publication 4345 explains. A car crash claim for missed work because of a broken wrist is in the first group, not the second.

Which parts of a settlement are taxable?

Even in an injury case, some money can be taxed:

• Interest. Interest on a settlement or judgment is generally taxable interest income (Publication 4345). The IRS says to report interest even if you do not receive a Form 1099-INT (Topic 403).
• Punitive damages. These are taxable even when they come from a physical injury case, according to Publication 525. A narrow exception applies to certain wrongful death awards.
• Medical expenses you already deducted. If you itemized and deducted accident-related medical costs in an earlier year under 26 U.S.C. 213, the part of the settlement that repays those costs is income to the extent the deduction gave you a tax benefit.
• Emotional distress with no physical injury. That is generally taxable, minus medical costs for the distress that you did not deduct.

Example only. A settlement pays $50,000 for injuries from a crash plus $1,200 of interest because payment came late. Under the rules above, the $1,200 of interest would be taxable and the injury amount generally would not. The wording of your agreement and your own tax history decide the real result.

Is the money for my car taxable?

Usually not. Publication 4345 says a property settlement for loss in value that is less than your adjusted basis in the property is not taxable, but you reduce your basis by the amount received. Only an amount above your basis is income. For most people, a payment to repair or replace a used car does not exceed what they paid for it.

Do I pay tax on the part that goes to my lawyer?

It depends on whether the recovery itself is taxable. The Supreme Court held in Commissioner v. Banks (2005) that, as a general rule, when a recovery is income, the part paid to the attorney as a contingent fee is also the client’s income. When the recovery is excluded as physical injury damages, there is no income to split.

You may see tax forms anyway. Under the IRS instructions for Form 1099-MISC, an insurer that pays settlement money to your attorney generally reports the gross proceeds paid to the attorney in box 10. A form reports a payment. Whether any of it is taxable to you depends on what the money was for.

Do California, Texas or Washington tax a settlement?

• California generally follows the federal rule. The Franchise Tax Board states that California conforms to IRC section 104 as of January 1, 2015 (FTB analysis).
• Texas has no state income tax, per the Texas Comptroller.
• Washington does not currently have an individual income tax. The Department of Revenue says a new tax on income above $1 million begins in 2028.

What to do now

1. Read how your settlement agreement describes the payment. Publication 4345 says the IRS generally will not disturb an allocation that matches the substance of the claims.
2. Ask whether any part of the check is interest or punitive damages, and get that in writing.
3. Check your past returns. If you itemized and deducted crash-related medical costs, tell your tax preparer.
4. Keep every page of the settlement and closing statement with your tax records.
5. If part of the money is taxable and you expect to owe $1,000 or more, ask about estimated payments (IRS).
6. If you get advance premium tax credit payments for coverage through the Health Insurance Marketplace and part of the settlement is taxable, report the change in income to the Marketplace, as Publication 4345 advises.
7. Talk to a CPA or other tax professional before you file.

Talk to someone about your claim

This page explains general tax rules and is not tax advice for your situation. If you have questions about how your settlement is being written, call Beverly Law at (310) 552-6959. We handle car accident cases in California, Texas and Washington. Texas cases are handled by the firm’s Texas-licensed attorneys, Joyce Ondich and John Efstathiou. You owe no fees or costs unless we win.

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Car Accident Settlements · Car accident settlements · How much to expect in California · Texas settlement amounts · Law Blog

Important: This page is general information, not legal advice, and reading it does not create an attorney-client relationship with Beverly Law. Laws change and every case is different; talk to a lawyer about your own situation. Attorney advertising. Prior results do not guarantee a similar outcome. You owe no fees or costs unless we win. Texas cases are handled by the firm’s Texas-licensed attorneys, Joyce Ondich and John Efstathiou. Last reviewed: 2026-11-12.