Orlando Harmon
When it comes to federal taxes, the IRS generally does not regard insurance payments as taxable income, as long as they are intended to restore your financial position to what it was prior to a covered incident. However, there are certain situations in which you may be required to pay taxes on insurance payments, such as when your insurance payout exceeds the value of the actual loss or when you receive disability insurance proceeds. It's important to note that any medical claims made to insurance are typically not taxed, and you should consult with a tax professional to understand specific circumstances. This paragraph provides an introduction to the topic of reporting insurance on federal taxes, highlighting key considerations and exceptions.
| Characteristics | Values |
|---|---|
| Money received as part of an insurance claim or settlement | Not taxed |
| Medical claims | Not taxed |
| Reimbursements | Not taxed |
| Reimbursements for business losses | Taxed |
| Reimbursements for insurance premiums | Taxed |
| Interest on insurance settlements | Taxed |
| Disability insurance | Taxed |
| Life insurance | Not taxed |
| Forms | 1095-A, 1095-B, 1095-C, W-4S, 1040-ES, 1040, 1040-SR, 1040-NR, 8962, 1040-X |
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What You'll Learn
Reporting insurance claim taxable income
Money received as part of an insurance claim or settlement is generally not taxed, as the purpose of insurance is to "make you whole" again. In other words, you should only receive enough payment to bring you back to the state you were in before an incident occurred. For example, if you receive a payout from your insurer to fix your car, this won't be taxable if the money is only used to repair your car to its previous state.
However, income from certain types of claims and insurance-related events may be taxable. For instance, if you receive a payout for lost income, this must be included in your tax return as income. Similarly, if you receive more money than you need to repair or replace damaged property, the excess amount may be considered a gain and could be subject to tax. This also applies to business interruption insurance, which is intended to cover lost profits, and therefore proceeds from this type of insurance are typically considered taxable income.
Any medical claim you make to insurance, whether as part of a settlement after an accident or for a medical appointment, won't be taxed. This is because the money is only reimbursing you for money you previously spent, and therefore you haven't gained anything. Even if you pay out of pocket for a medical expense and are reimbursed later, you won't have to pay taxes on the amount you're paid.
If you receive life insurance proceeds as a beneficiary due to the death of the insured person, this also isn't generally included in gross income and doesn't need to be reported. However, any interest you receive is taxable and should be reported as interest received.
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Reporting health insurance on federal taxes
If you have health insurance, you may be wondering how it impacts your federal taxes. Here is some information on reporting health insurance on your federal tax return.
Forms Related to Health Insurance
Health insurance providers may send Form 1095-B to individuals they cover, detailing who was covered and when. Certain employers will send Form 1095-C to employees, outlining the coverage offered. These forms can be used to help file taxes, but they should not be attached to your tax return. Instead, keep them on hand in case they are needed for reference.
If you or a member of your tax family received advance payments of the premium tax credit (APTC) for health insurance coverage through the Health Insurance Marketplace, you must complete and attach Form 8962, Premium Tax Credit (PTC), to your tax return. This form is also used to report a net premium tax credit (when the credit exceeds the APTC).
Reporting Health Insurance Coverage
When it comes to reporting health insurance on your federal tax return, there are a few scenarios to consider:
- Marketplace Plan without Premium Tax Credit: If you enrolled in a Marketplace plan but paid the full price, you don't need to include this information on your tax return.
- Job-Based Health Coverage: If you had health coverage through your job, a retiree health plan, COBRA, or the Small Business Health Options Program (SHOP), there is no specific reporting required on your tax return.
- Other Health Coverage: If you purchased a plan outside the Marketplace or had coverage through Medicare, Medicaid, or the Children's Health Insurance Program (CHIP), no additional reporting is necessary.
- No Health Coverage: If you did not have health coverage for all or most of the year, this information is not specifically reported on your tax return.
Reporting Health Insurance Benefits
Any medical claim or reimbursement from your health insurance company is typically not taxed because it is not considered income. However, if you receive disability benefits through your health insurance plan, the taxability may depend on who paid the premiums. If both you and your employer contributed, only the amount attributable to your employer's payments is reported as income. If you paid the premiums through a cafeteria plan, the disability benefits are fully taxable.
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Reporting life insurance on federal taxes
Life insurance payouts to beneficiaries are often tax-free. However, there are certain situations in which life insurance proceeds are taxable.
If you own a term life insurance policy when you pass away, the death benefit becomes part of your taxable estate. While this generally affects only high-net-worth individuals, some states have lower thresholds for estate taxes. If the death benefit exceeds the federal estate tax exemption ($13.99 million in 2025), estate taxes will be triggered.
If the death benefit is paid out in installments rather than a lump sum, any interest accumulated on those payments will be taxed as regular income. If the payout is spread over time, your beneficiaries should be prepared to report the interest on their taxes.
In a scenario where three different individuals are involved in a life insurance policy (one person is the policy owner, another is the insured, and a third is the beneficiary), the IRS could view the death benefit as a gift from the policy owner to the beneficiary. This triggers a gift tax if the amount exceeds the annual exclusion limit, which is $19,000 in 2025.
If you decide to make a withdrawal from a universal life insurance policy, the IRS will only tax the portion that exceeds your cost basis (the total amount of premiums you've paid into the policy). The withdrawal amount up to your cost basis is tax-free, but anything above that is considered taxable income and must be reported.
If you pay the premiums of a health or accident insurance plan through a cafeteria plan and didn't include the premium amount as taxable income, the premiums are considered paid by your employer, and the disability benefits are fully taxable. If the amounts are taxable, you can submit a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, to the insurance company or make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals.
You can generally exclude from income certain payments received under a life insurance contract on the life of a terminally or chronically ill individual (accelerated death benefits). Refer to Publication 907, Tax Highlights for Persons with Disabilities. You may be able to deduct your out-of-pocket expenses for unreimbursed medical care if you're eligible to itemize your deductions.
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Reporting insurance settlement payments
Money received as part of an insurance claim or settlement is typically not taxed, as the purpose of insurance is to "make you whole" and return you to your previous state. For example, if your car is damaged in an accident and you receive a payout from your insurer to cover repairs, this is not considered taxable income as it does not make you wealthier than before—it simply restores your car to its pre-accident state. Similarly, any medical claim you make to insurance, whether as part of a settlement or for a routine appointment, is not taxed. This includes reimbursements for out-of-pocket medical expenses.
However, there are some exceptions to this rule. If you receive a settlement payment as part of a lawsuit, the tax situation can become more complicated. While compensation for medical bills and property repairs is generally not taxed, some types of payouts resulting from legal settlements may be taxable. For example, punitive damages awarded by a judge are taxable. Additionally, if you have extra money left over from your insurance claim after your property has been repaired or replaced, this may be considered taxable income. This can occur if the insurance company overpaid you or if you performed the repairs yourself and paid yourself for the work. In these cases, you will receive a 1099 form to help you file your taxes.
It's important to note that disability insurance proceeds are taxed differently. If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is attributable to your employer's payments is reported as income. If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return. However, if you pay the premiums through a cafeteria plan and did not include the premium amount as taxable income, the disability benefits are fully taxable. In this case, you can submit a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, to the insurance company or make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals.
When it comes to health insurance, certain payments can be excluded from income. You can generally exclude payments received as reimbursement of medical expenses for personal injury or sickness under an accident and health insurance contract. Additionally, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual (accelerated death benefits) can also be excluded. These exclusions are outlined in Publication 907, Tax Highlights for Persons with Disabilities.
In the context of Medicare, beneficiaries must notify Medicare when a claim is made against an alleged tortfeasor with liability insurance, no-fault insurance, or Workers' Compensation. This can be done through the Medicare Secondary Payor Recovery Portal (MSPRP) or by contacting the Benefits Coordination & Recovery Center (BCRC).
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Reporting insurance premiums
If you have enrolled in a Health Insurance Marketplace plan, you must file a tax return. You may be able to deduct your health insurance premiums on your federal taxes if you meet certain conditions. Firstly, you need to buy your own health insurance and spend more than 7.5% of your income on medical expenses. Secondly, you must itemize your deductions. However, if you have health insurance through your employer, you cannot claim what you pay for premiums because it is already taken from your paycheck before taxes.
If you are self-employed, you can deduct health insurance premiums on your taxes. If your business reports a net profit on your taxes, you can normally deduct health insurance premiums on your taxes. This includes payments for yourself and any children under the age of 27, regardless of whether you claim them as dependents. You don't need to itemize your deductions to get this benefit. However, if you are an S corporation shareholder, you need to own more than 2% of the company's outstanding stock to deduct your health insurance premiums on your taxes.
You can deduct your COBRA premiums on your taxes because you pay for this with after-tax money. You can only deduct medical expenses on your taxes if they make up more than 7.5% of your income, and you itemize your deductions. You can also deduct your Medicare premiums on your taxes if you itemize your deductions and pay more than 7.5% of your income for medical costs.
If you are claiming a net premium tax credit (the amount by which your premium tax credit is more than your APTC) for 2020, you must file Form 8962, Premium Tax Credit (PTC). For tax years other than 2020, if advance payments of the premium tax credit (APTC) were made for your or a member of your tax family's health insurance coverage through the Health Insurance Marketplace, you must complete Form 8962, Premium Tax Credit (PTC), and attach it to your return. You will receive Form 1095-A, Health Insurance Marketplace Statement, which provides you with information about your health care coverage.
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Frequently asked questions
Money received as part of an insurance claim or settlement is generally not taxed. However, if your insurance payout exceeds the value of the actual loss, that excess may be considered taxable income.
Yes, there are some cases where you may be taxed on insurance payments, such as when your insurance payment increases your wealth rather than restoring your financial position. For example, if you receive a large payout from your insurer to fix your car, but the money is not entirely used to repair your car to its previous state, that excess money may be taxed.
Any medical claim you make to insurance, whether as part of a settlement after an accident or a claim for a medical appointment, is not taxed. This is because the money is simply reimbursing you for money you previously spent.
If both you and your employer pay for the plan, only the amount you receive for your disability that is due to your employer's payments should be reported as income. If you pay the entire cost of the plan, do not include any amounts you receive for your disability as income on your tax return.
If the amounts are taxable, you can submit a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay to the insurance company, or make estimated tax payments by filing Form 1040-ES, Estimated Tax for Individuals. You may also receive a Form 1095-B from your health insurance company, which provides information about who was covered and when.
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