Insurance settlement

[jkaufmann]

What is the name of your state? Minnesota
My wife just received a lump sum insurance settlement for "pain and suffering" from an accident she was in. (the accident was not her fault) The settlement was from the other parties insurance company.
My question is: Is this settlement considered income and will we need to pay income taxes on it? If so, approximately how much would the taxes be?

 

[shortbus]

No, it's not taxable at the federal level. Pain & suffering is a compensatory award -- the assumption is that it's putting you back to where you were before the accident, not making you wealthier.

For instance, if your car was damaged & you got $5000 from the ins co to repair it, that wouldn't be income, because the money is just restoring the status quo. Same principle applies here.