New York State Tax

Insurance Settlements and Tax

There are several common types of insurance settlements, and in most cases these settlement amounts are not taxable. To find out for sure about an insurance settlement, a person should contact a tax advisor to find out the exact requirements of the settlement amount. The three most common types of insurance settlements come from personal injury damages, property damages and punitive damages.

For the most part, personal injury damages and property damages settlements are not taxable. In a personal injury case, the settlement amount received is primarily to pay for damages that occurred to a person's body because of another person's negligence. This amount therefore, is not considered taxable income. If the settlement amount is to cover medical bills, it is not taxable. There is one exclusion with this though. If part of the settlement amount is intended to cover emotional stress suffered by a victim, this amount could be taxable. When a person receives a property damages settlement, the payment is intended to be applied towards the rebuilding or replacing of damaged property. In this case, again, the insurance settlement is most likely not taxable.

The one type of insurance settlement that is usually taxable is a punitive damages settlement. Punitive damages are amounts awarded to victims in excess of medical or property bills. These settlements are intended to punish the person who harmed another person, and to discourage that person from doing something like this again in the future. In almost all cases, punitive damages settlements are considered taxable income. Again, it is always important to talk to a tax advisor to find out what your tax liabilities are for sure.

The purpose of an insurance settlement is to cover costs incurred due to an accident of some kind. This is the primary reason people purchase insurance policies. Because of this reason, most insurance settlements are given to cover the costs to replace or fix something that is damaged. The damaged item might be a physical item, such as a car or home, or it could be a body part. In most cases, any settlements awarded for these things will not be considered taxable. The primary time an insurance settlement is considered taxable is when the settlement covers something else, such as emotional or mental distress.

If you need help filing your income tax return or have other questions regarding insurance and tax, you can use these links to find professional legal services and Certified Public Accountants in your area.