How To Pay Taxes On Insurance Settlement

Some of us end up stressed out or paying major penalties because we didn't know how to pay taxes on an insurance settlement. As it turns out, though, tax law is surprisingly simple when it comes to insurance benefits. The information in this article applies specifically to United States Federal Tax Code. You should consult with local experts if you live in another country. United States residents should double-check this information against their state tax code, which may have different guidelines for paying taxes on insurance.

  1. Confirm what portion of the settlement represents your insurance benefit. In general, insurance benefits are not taxable events under US tax code.
  2. Total what portion of the settlement comprises reimbursement for legal fees, court fees and expenses incurred while negotiating the settlement. Like other reimbursements, this portion of your insurance settlement is not taxable.
  3. Note what remains of the insurance settlement, typically damages awarded to you by the court. Damages are frequently a taxable event, so keep this number for your records and be prepared to pay taxes on it.

Note:

  • These rules apply only to insurance settlements paid directly to you by your insurance company. Life insurance benefits paid to an estate are subject to estate tax.

Warning:

  • Tax code is very complex and carries major repercussions for making a mistake. If you have any doubts about your situation, consult with an accountant or tax attorney. Even if you don't have any doubts, it's best to double-check if your insurance settlement is large. Don't worry about settlements below $10,000 or so: the tax burden won't be enough to get you into real trouble. 
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