Federal Tax On Auto Accident Settlement  

A general guideline is that federal tax is applicable on an auto accident settlement if it is in compensation for loss of taxable income, for instance the wages of a person has lost during hospitalization and convalescence resulting from an automobile accident.

However, if the settlement is towards vehicle repair expenses, hospital bills and related medical expenses, or household assistance, then federal tax is not applicable. This is of course on the assumption that you have not claimed deduction for the casualty loss. In other words since you have been compensated you have suffered no loss and so are not eligible to claim a reduction. An auto accident settlement is viewed as the cost of restoration of your property to a condition before the accident.

If the insurance payment exceeds the cost of the damage, then in effect you have a taxable gain on which you are liable to pay taxes. In the case of a car accident such situation is so remote that it has been discounted. The amount you receive by way of an accident settlement is deemed an adjustment to the cost of a car. Whether you repair the car or not has no bearing on whether you have a taxable gain. If your car, for example, cost $22,500.00 and the damage estimate is $5,000.00, then the revised estimated value of your car will now be only $17,500.00. The $5,000.00 you receive by way of a settlement goes to compensate you for the loss in value consequent on the accident, whether or not you decide to repair it. Hence, there is no gain and no taxes are liable.

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