At 68, He’s Set to Receive a $200,000 Crash Settlement. The Injury Payment Isn’t Taxed, but the Interest Is

A $200,000 car-crash settlement can look like straightforward money in the bank, but one small component may still follow a retiree into the tax return. Before anything is signed, it helps to know which portion the IRS still considers taxable.

After a long recovery from a car crash, he finally gets word at 68 that the case has settled for $200,000. Relief comes first, but the key question is how much of that amount the IRS can claim.

In most cases, the injury payment itself is not taxed. The taxable piece is often interest, and even a modest amount can affect how much Social Security is taxed and what a retiree pays for Medicare. This situation is common for people in their late 60s who receive money after a crash, fall, or medical injury.

Why the Injury Payment Usually Avoids Tax

Federal tax law excludes “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness”. In plain English, compensation for a physical injury is not treated as income.

Emotional distress tied to a physical injury or sickness is also treated as part of the injury award and is generally tax-free. But emotional distress without an underlying physical injury, such as distress from discrimination or harm to reputation, is different and must usually be reported as income.

Three Settlement Pieces That Can Be Taxable

1. Interest. IRS guidance treats interest on an award as ordinary income, even when the underlying award is tax-free.
2. Punitive damages. These are intended to punish the other side and are usually taxable, regardless of whether the case involved a physical injury.
3. Medical bills previously deducted. If crash-related medical expenses were itemized and deducted in an earlier year, the part of the settlement that reimburses those expenses can be taxable. The law excludes amounts tied to deductions allowed under section 213 in earlier years. If the earlier deduction did not reduce tax, however, the recovery is not taxed under the tax benefit rule.

Attorney fees can complicate matters. When part of a recovery is taxable, the IRS generally treats the related legal fees and costs, including contingent fees, as income to the taxpayer. Discrimination claims get a special deduction for those fees; car-crash claims do not.

How Taxable Interest Can Affect Medicare and Social Security

Amounts excluded from income do not appear in adjusted gross income, the central income figure on a tax return. That keeps the injury payment out of the calculations for both retirement programs. The interest, however, still counts.

For Social Security, the IRS generally adds half of a person’s benefits to other taxable income and any tax-exempt interest. If that total exceeds $25,000 for a single filer or $32,000 for a married couple filing jointly, part of the benefits can become taxable.

Medicare works differently. The IRMAA surcharge uses AGI plus tax-exempt interest income and looks back roughly two years, so premium changes are generally based on tax return information from that earlier period. In 2026, single filers with income above $109,000 pay $284.10 a month for Part B rather than the standard $202.90.

If he places the money in a CD paying about the national average of 1.76%, that would produce roughly $3,520 a year on $200,000. Top online banks may pay around 4% to 4.5%, which would generate more. All of it is taxable interest. For many retirees, that is still far below IRMAA thresholds, but it can increase the amount of Social Security that becomes taxable. He should plan for that before the 1099 arrives.

Check the Settlement Language Before You Sign

The IRS taxes a settlement based on what the payment replaces, and the written agreement is the best proof of that.

Make sure the agreement connects the payment to physical injury and separately identifies any interest or punitive damages. If the language is vague, the IRS may interpret it on its own, and that usually does not favor the taxpayer.

Structured settlements, which pay over time instead of in a single lump sum, can also qualify for tax-free treatment under the same periodic-payment rules. The tradeoff is that these payments generally cannot be accelerated, deferred, increased, or reduced.

At 68, with medical bills still in the picture and $200,000 at stake, many people are better off taking the lump sum and keeping control of the money. Structured payouts tend to make more sense in larger cases that involve lifelong care.

What to Do in the First Few Months

Start by paying medical bills and any debt that built up during recovery. Then rebuild the emergency fund that the crash likely emptied. Whatever remains should be placed in safe, simple vehicles such as Treasury bills or CDs, while keeping deposits within FDIC insurance limits.

Hold off on major decisions for a while. Buying a home, giving money to family, or purchasing an annuity can wait until the situation is clearer. A lump sum sitting in checking may feel urgent, but it does not have to be spent right away.

Save the Settlement Paperwork Permanently

Keep the signed settlement agreement in a permanent file. If the IRS ever asks why the $200,000 was not reported as income, the agreement and supporting records can show that the payment was for physical injuries. Before signing, confirm that interest is listed separately and plan to report that part.