Different rules apply regarding taxes on insurance settlements based upon what the settlement was for exactly.  Some settlements will be taxed as they are considered a gain while others are not considered taxable income. It is a complex topic and you should consider meeting with a tax professional and/or a financial advisor to discuss your particular settlement.

Property damage or physical injuries the government does not charge tax on insurance settlements of this nature. These types of insurance settlements are not considered as gain, unless there are punitive damages.  The government will charge tax on insurance settlements when it comes to punitive damages as they are considered a gain.

The way gain is determined is by comparing the proceeds of the insurance settlement to the actually cost of the property.  Say for example you paid $75,000 for your home and that you experienced excessive damage to your home and it was covered by insurance. You then received $75,000 settlement.  If you used the entire settlement to fix your home you would have no gain, however if you only used $50,000 to fix your home you could actually have a $25,000 gain.  That money could be taxed!  There are ways to avoid taxes on this gain with re-investment within two years.

If you do have a large insurance settlement coming to you, you would be wise to ask for a structured settlement.  There are no taxes on insurance settlements for property damage and physical injuries, but if you invest that money any interest or dividends received will be taxed!

If you ask for and receive a structured insurance settlement, your money will earn interest at pretty high rates and you will receive a regular income for many years without ever having to pay a penny in taxes!  In this way you get to take advantage of receiving interest on your settlement money without having to pay Uncle Sam for the extra money. Structured insurance settlements are the best way to make that money grow without having to pay for it.

Obviously every situation is different, has unique circumstances and is specific to the individual.  If you have medical liens or attorney fees these will be deducted from your insurance settlement. That is standard practice.

Due to the large number of variables you would be wise to contact a tax professional before you are going to receive an insurance settlement.  There are many rules, regulations, and exceptions when it comes to taxes on insurance settlements.  It is impossible to address each possible scenario here.  Consulting a tax professional or a financial advisor could save you thousands of dollars in possibly avoidable taxes!

If you have already received a large insurance settlement you should immediately contact a financial advisor!  It may be possible to set up what is called settlement trusts wherein you receive periodic payments that are also tax free.

A financial advisor can assist you in finding ways to make your insurance settlement grow without having to share the wealth with Uncle Sam.  It is well worth the time and effort to meet with a financial advisor.