Are Personal Injury Settlements Taxable in Texas?

Personal injury settlements are generally not taxable under state or federal tax laws. However, there are some exceptions, so it’s important to understand them and to work with an experienced San Antonio personal injury attorney who can guide you through this process and work to minimize the tax effect on your case proceeds.

General Treatment of Personal Injury Settlements

In Texas, most forms of financial compensation that comprise personal injury settlements are not subject to taxation, including costs intended to compensate the victim for the following:

• Medical treatments and healthcare costs: Damages awarded to pay for medical costs related to your injury is generally not taxable, unless you deducted the medical expenses on your tax return and derived a tax benefit from the deduction.
• Property damage: Compensation that reimburses you for damaged property is not taxable unless the amount of compensation exceeds the value of the property.
• Pain and suffering: Compensation awarded for your physical pain and suffering that is directly related to physical injuries is not taxable.
• Emotional distress: Likewise, compensation for emotional distress tied to physical injuries or sickness is not taxable.
• Loss of consortium: Damages for loss of consortium tied to physical injuries are not taxable.

Section 61 and Section 104 of the Internal Revenue Code state that amounts paid for physical injury are not included in a taxpayer’s gross income for federal tax purposes.

Generally, the above-received compensation is not taxed under federal or state law, whether that compensation arises from a court award or a personal injury settlement.

Exceptions to the Taxation Rule

Despite the general rule that personal injury settlements are not taxable, there are exceptions. If your personal injury settlement or award involves any of the following types of damages, those portions could be taxed:

• Lost wages: Because lost wage compensation replacement income that would have been taxed, it is taxed. While Texas does not have state income tax, you will still be responsible for paying federal income tax on this portion of your settlement.
• Emotional distress: If you receive compensation for emotional distress that is not directly tied to physical injuries, this portion of your award can be taxed.
• Punitive damages: In cases involving outrageous conduct, a judge or jury may award punitive damages to punish the wrongdoer and deter similar conduct in the future. The IRS considers punitive damages taxable income.
• Interest: If your settlement involves interest that was accrued between the time of the injury and the settlement payment, the interest is taxable.
• Non-physical injuries: Settlements for non-physical injuries, such as those for defamation or employment discrimination, are usually taxable.

How an Experienced Personal Injury Lawyer Can Help

An experienced personal injury lawyer in Texas from The Aguirre Law Firm can guide you through the complex insurance claim process and can handle the tax implications of your personal injury settlement or judgment award. Your lawyer can help structure your settlement in a way that minimizes the tax treatment. Contact us today to take advantage of a free case review.