Recoveries in personal injury settlements arising out of car accidents are generally not taxable. This same rule applies to other personal injury settlements. The general reason for this rule is that personal injury recoveries compensate you for your physical injuries and losses from the accident, and have no positive or negative impact on your income.

Accident Recoveries That Are Not Taxable

26 CFR § 1.104-1 is the Internal Revenue Service regulation addressed to when personal injury settlements and judgments are taxable. The IRS outlines the taxability of personal injury settlements in IRS Publication 4345.

Settlements for personal physical injuries are not taxable, so long as you did not take an itemized deduction for medical expenses related to the injury in prior years. If you have not taken such a prior itemized deduction, you should not include the settlement proceeds in your income.

Recoveries for pain and suffering associated with your physical injuries from a car accident or other personal injury accident are also not taxable.

Medical expenses paid as part of a personal injury recovery, under auto policy personal injury protection coverage, or under health insurance, are not taxable.

So long as any property damages you recover, for example to repair or replace your car, are no greater than the actual cost to repair or the pre-accident value of your car, they are also not taxable.

Accident Recoveries That Are Taxable

If you deducted medical expenses associated with your physical injuries from a car accident and then receive a settlement on the accident in a subsequent year, you must include as income that portion of the settlement that is for the medical expenses you deducted in any prior year(s).

Recoveries for emotional distress not associated with a physical injury are taxable.

If a portion of your settlement is for wages you lost as a result of the accident, that portion of the settlement is taxable. The wages you would have earned at work are taxable, so the amount you receive in payment of wages you lost as a result of the accident is also taxable.

Interest you earn on your settlement proceeds is also taxable. Although not recoverable in Washington, punitive damages are also taxable.