Hand Putting Tax Wooden Cube on top of other wooden cubes

Will I Be Taxed on My Personal Injury Settlement?

Jose Orihuela, Attorney at Law May 16, 2023

If you’ve been injured as the result of an accident, you’re likely entitled to compensation from the at-fault party. Accidents like this are more common than you may think, whether they happen while you’re at work, on public property, or driving on the state’s roadways. In fact, in 2021 alone, 19,448 people sustained a serious injury from a vehicle crash, according to data from the Texas Department of Transportation.  

When you finally do get through the long and complicated process of receiving a settlement, you’ll need to know about the taxation laws in Texas for personal injury claims. For help with this and to speak with a personal injury attorney, call me, Jose Orihuela, Attorney at Law. I’m able to help those in Houston, Texas, as well as Webster, South Houston, Pasadena, Clear Lake, Friendswood, League City, Alvin, Dickinson, Bacliff, Kemah, Seabrook, and Santa Fe.  

IRS and State Taxes After Receiving Compensation

Settlements can often be very large in a personal injury lawsuit, and while this may seem like a huge windfall, it’s also intended to cover a number of damages inflicted on the victim. This includes compensation for previous, current, and future expenses associated with medical care, lost wages, and general pain and suffering. However, some of this money may be subject to taxes, and it’s essential to understand what taxation on personal injury compensation entails ahead of time: 

  • Actual damages resulting from physical or non-physical injury: Most compensation received that’s directly related to a physical injury will be non-taxable. This could include medical expenses as well as pain and suffering.  

  • Emotional distress damages arising from the actual physical or non-physical injury: There won’t be any taxation on emotional distress compensation as long as you can show that the distress was caused by the original sickness or injury.   

  • Punitive damages: Punitive damages are somewhat rare, but when they are awarded, you’ll be expected to pay taxes on them.  

Exceptions to the Rule

In any personal injury cases, you should be working closely with your attorney so they can advise you on the tax implications of your specific case. However, there are a few exceptions that you should be aware of: 

  • Medical expenses: If in your prior year’s tax returns, you’ve taken deductions on medical expenses related to your accident, you’ll have to pay taxes on this new compensation.  

  • Property damage: If you receive compensation for property damage and this amount exceeds the value of the property, then you only have to pay taxes on the excess amount. 

  • Emotional distress: If you claimed emotional distress in your lawsuit but it was not directly related to a physical injury, you must pay taxes on compensation related to this.  

Taxable Personal Injury Damages

The main types of damages that may be taxable in a personal injury case will be emotional distress that's not related to a physical injury, interest that’s accumulated on your settlement, and punitive damages. It’s also worth noting that if you do need to pay taxes on your settlement, it will be based on the total amount received before your attorney has received their payout. For example, if you won a settlement for $50,000 and your attorney received $10,000, you’d still have to pay on the entire $50,000, not $40,000.  

Exempt Personal Injury Damages

Personal injury damages that are not taxable include medical expenses, attorney fees, pain and suffering, and loss of consortium. Additionally, a personal injury settlement is only taxable at the state level and not at the federal level.   

Rely on Trusted Legal Guidance

If you're in the Webster or Houston, Texas, areas and would like to speak with a personal injury attorney about what parts of your settlement will be taxable, contact me, Jose Orihuela, Attorney at Law, today.