Do Insurance Settlement Payouts Due to Injuries Get Taxed by the Federal Government as Income?

If you're out of work with an injury, payments covering lost wages are taxable.

If you're out of work with an injury, payments covering lost wages are taxable.

When you're recovering from an injury, you probably don't want to think about taxes. If you're receiving an insurance payout because of your accident, though, you may have no other choice. Depending on what sort of policy you're dealing with, and what sort of settlement you received, some of the settlement money may be taxable.

Damages

If you get a settlement from someone else's insurance — the homeowner whose hose you tripped over, or the driver who rammed your wife's car — the part that goes to pay for your injuries is not taxable income. This also includes payments for emotional distress if the distress is blamed on your injuries. If you receive punitive damages as well, you have to pay tax on them, even if the punishment relates to your injury.

Health Insurance

If your own insurance gives you a payout when you're injured, you may have to declare the income, depending who pays for the policy. If you put up 100 percent of the money, you don't have to declare any of the benefits; if your employer pays the entire premium, all the payouts are taxable. When your employer pays part of the premium, you declare that percentage of the settlement as taxable income. If the employer pays 40 percent, you report 40 percent of the payout to the IRS.

Other Insurance

Long-term disability insurance works like regular health insurance: it's not taxable if you pay for the policy, but the payouts become more taxable the more your employer contributes to the premium. You can either ask your insurer to withhold some of the money, like your employer withholds part of your paycheck or pay estimated tax on it. If you receive a payout from your employer's workers' compensation insurance, that money 100 percent tax-free. Money you get from a state disability fund is taxable income.

Considerations

Insurance money that the company pays to cover medical bills isn't taxable income. If you've claimed any of the expenses as a tax deduction, then get an insurance payment later that covers the costs, you have to report the insurance payment to compensate for the deduction. Payments or settlements for lost wages due to injuries are taxable income. In some cases, you may have to review your settlement and separate out the payment for injuries from the lost-income payments and punitive damages.

 

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