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The Internal Revenue Service (IRS) may count insurance settlements as taxable income. If you are in an accident and injured, or your car sustains damage, money you receive to repair your car is not taxable, nor is any settlement you receive for your injury or illness. However, if you receive a settlement for emotional distress, punitive damages or lost wages, the IRS counts the money as taxable income.
Source:
IRS.gov: Publication 525, Taxable and Nontaxable Income
MSN: Income Tax Planning, the IRS, and Income from Court Settlements
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