Answers from a Personal Injury Attorney: Are Personal Injury Settlements Taxable in Texas?

Corpus Christi Personal Injury Lawyer: Taxable or Not?

Following an accident where you were injured, you have a right to pursue a personal injury claim. A personal injury settlement may never fully make up for how you and your loved ones have been injured, but you deserve to be compensated for your suffering and loss. However, once you’re compensated, the question arises: am I going to be taxed for this money? 

It is important to consult with a tax expert regarding any compensation you receive as the tax implications of a settlement can be complex. In Texas, personal injury settlements are generally non-taxable. This means that the compensation received in a personal injury case is not considered taxable income at the state or federal level. The Internal Revenue Service (IRS) follows this same principle. This is because the tax code distinguishes between compensatory damages and punitive damages.

Compensatory damages, which make up the majority of personal injury settlements, are intended to compensate the injured party for their losses (such as medical bills, lost wages, etc.). In Texas, these damages are not subject to state income tax.

On the other hand, punitive damages are designed to punish the responsible party for their wrongful actions rather than to compensate the victim and these damages are subject to taxation. Punitive damages are not as common, but are awarded in cases involving intentional harm, gross negligence, or willful misconduct.

As mentioned, personal injury settlements are generally not taxable at the federal level, in accordance with IRS guidelines. This holds true whether the settlement is reached through negotiation or is awarded at trial.

Exceptions and Considerations From A Personal Injury Lawyer in Corpus Christi

While personal injury settlements are largely non-taxable in Texas, there are exceptions and important considerations to keep in mind:

Structured Payments: If a personal injury settlement includes an element of interest or investment income on the awarded funds, that interest may be subject to taxation.

Deductible Expenses: If the injured party claimed medical expenses related to the injury as deductions on their prior tax returns, they may be required to report any portion of the settlement that covers those expenses.

Legal Fees: Legal fees associated with the personal injury case may or may not be tax-deductible, depending on the circumstances. It's advisable to consult with a tax professional for guidance on this matter.

In Texas, personal injury settlements are typically non-taxable, in line with federal IRS guidelines. Compensatory damages, which form the core of these settlements, are intended to reimburse individuals for their losses and suffering, making them exempt from taxation. It's essential to note that punitive damages and certain exceptions related to structured payments, deductible expenses, and legal fees can affect the taxability of a personal injury settlement. Your personal injury attorney will help you better understand the specific variables of your case and maximize the settlement you receive. However, it is essential for you to consult a tax expert for any compensation you are awarded to understand the tax implications of any money you receive and help you make informed financial decisions.