Federal income tax
Section 104(a)(2) of the Internal Revenue Code excludes from gross income “the amount of any damages (other than punitive damages) received” on account of personal physical injuries or physical sickness. IRS Publication 4345 applies this to settlements:
| Part of the recovery | Federal tax treatment |
|---|---|
| Damages for physical injury, including pain and suffering and lost wages tied to the injury | Generally not taxable |
| Reimbursement of medical expenses you deducted in earlier years | Taxable to the extent the deduction gave you a tax benefit |
| Emotional distress without a physical injury | Taxable, except amounts up to medical care paid for it |
| Interest on a judgment or settlement | Taxable as interest income |
| Punitive damages | Taxable, even in a physical injury case |
How a settlement agreement allocates the payment can matter. We draft releases with this in mind, but we do not give tax advice; your accountant should review anything unusual.
Your no-fault insurer usually gets nothing
Michigan’s no-fault act protects your recovery from your own PIP insurer. Under MCL 500.3116, a PIP insurer may subtract from benefits, or be reimbursed from a tort recovery, only when the claimant actually recovers and one of three things is true:
- The crash happened outside Michigan
- The claim is against an owner or driver who did not have the required Michigan insurance
- The claim is for intentionally caused harm
Even then, the insurer cannot reach the part of the recovery for non-economic loss, or the part for excess medical, wage or survivors’ loss above what PIP paid. In the ordinary Michigan crash with an insured at-fault driver, PIP has no claim against your settlement. That is part of why excess claims and pain and suffering are recovered separately from no-fault benefits.
Medicare
Under the Medicare Secondary Payer law (42 U.S.C. 1395y(b)), Medicare is secondary to auto, liability and no-fault insurance. When Medicare pays crash-related bills, those payments are conditional and must be repaid from a liability settlement, judgment or award. CMS issues a demand after settlement and may reduce it for procurement costs such as attorney fees that the beneficiary paid. Federal law allows interest after 60 days and gives the United States the right to collect double damages from those who should have repaid, so Medicare is resolved before money is disbursed. See health insurance, Medicare and PIP for how Medicare interacts with PIP itself.
Michigan Medicaid
MCL 400.106 makes the state subrogated to your recovery for medical assistance it paid. The rules are specific:
- You or your attorney must notify the Department of Health and Human Services, and any Medicaid health plan involved, within 30 days after filing a lawsuit or, if you settle without filing suit, before settling, with the proposed terms.
- The department has first priority against the net recovery, followed by the health plan.
- If your net recovery would be less than the expenses Medicaid paid, you and the department share the net recovery equally.
- You cannot release the department’s claim without its consent, and an attorney who knowingly fails to give notice faces a civil fine.
Employer health plans (ERISA)
If an employer health plan paid crash-related bills, its plan documents may give it a right of reimbursement. Self-funded ERISA plans are generally exempt from state insurance regulation, so the plan language usually controls. In US Airways v McCutchen (2013), the U.S. Supreme Court held that clear plan terms govern reimbursement, and that when a plan is silent on attorney fees, the common-fund doctrine applies by default and the plan shares the cost of recovery. We request the plan document, not just the summary, before negotiating these claims.
Other deductions
- Attorney fees and case costs under your written fee agreement (see fees and costs).
- Provider balances that PIP did not pay because your coverage ran out. These often get paid from an excess economic damages recovery.
- Court approval for minors and legally incapacitated people under MCR 2.420, which can require a conservatorship.
Tell us about every plan that paid a bill. A lien discovered after the money is distributed can still be collected, and Medicaid notice has strict timing rules. Bring your Medicare, Medicaid and health insurance cards to the first meeting.
Sources: 26 U.S.C. 104(a)(2); IRS Publication 4345; MCL 500.3116; 42 U.S.C. 1395y(b)(2); CMS, Medicare Secondary Payer recovery process; MCL 400.106; US Airways, Inc. v McCutchen, 569 U.S. 88 (2013); MCR 2.420.
Questions people ask us
Is a Michigan car accident settlement taxable?
Damages received on account of personal physical injuries are generally excluded from federal income tax under IRC section 104(a)(2). Punitive damages and interest are taxable, and the portion that reimburses medical expenses you previously deducted can be taxable. Confirm your situation with a tax professional.
Does my no-fault insurer get paid back from my settlement?
In most Michigan cases, no. MCL 500.3116 allows a PIP insurer to be reimbursed from a tort recovery only if the crash happened outside Michigan, the defendant was uninsured, or the harm was intentional, and never from the non-economic part of the recovery.
Does Medicare have to be paid back from my settlement?
If Medicare paid for crash-related care, those were conditional payments that must be repaid from a liability settlement. Medicare can reduce its demand for procurement costs such as attorney fees that you paid.
Can I ignore a health plan’s lien if I settle?
No. Medicaid requires notice when a lawsuit is filed or before a settlement without suit, and Medicare and many employer plans can pursue recovery, sometimes against the attorney or the insurer that paid. Liens are resolved before the settlement money is distributed.