Are Personal Injury Settlements Taxable in Texas?
When receiving a car accident settlement, victims are often elated. They need this money to pay for medical bills, lost wages, property damages, and other damages. They’re not thinking about the future, but once tax time comes around, they may be frustrated to know that they may need to pay the IRS.
As we know, the only certainties in life are death and taxes. And even with a personal injury lawsuit, you do have to consider the possibility of taxes. But what you will be forced to pay depends on where you live.
Those who live in Texas get an advantage in this regard. Car accident settlements are generally not taxable at the state level because Texas does not have a personal income tax. However, federal taxes may apply depending on the nature of the settlement. Typically, settlements for physical injuries are not taxable at the federal level, while portions of the settlement related to punitive damages, lost wages, or emotional distress may be taxable.
The IRS has specific guidelines to determine when a personal injury settlement is taxable. Taxability of amounts received from settlement of lawsuits is outlined in Internal Revenue Code (IRC) Section 61.
The good news is that a large portion of personal injury damages is generally not taxable. This typically includes medical expenses, lost wages, and emotional distress.
However, some portions of a personal injury settlement may be taxable. These include:
- Punitive damages. Punitive damages are taxable because they are meant to punish the wrongdoer rather than compensate you for your losses.
- Interest on settlements. If your settlement includes interest due to delayed payments, this interest is considered taxable income.
- Emotional distress (not linked to physical injury). Compensation for emotional distress that isn’t tied to a physical injury might be taxable.
Keep in mind that lawyer’s fees may be taxable as well. Most personal injury lawyers are paid on contingency, meaning that the lawyer receives a percentage of the settlement and only when you win the case. Even though your attorney’s fees come out of your settlement, the IRS may still consider the total settlement amount when determining taxable income. This means you could owe taxes on portions of the settlement before attorney fees are deducted.
Knowing how to report personal injury settlement income is important. The good news is that you shouldn’t have to play any guessing games in this regard. If part of your settlement is taxable, you’ll likely receive an IRS Form 1099 to report it on your taxes.
Contact a Personal Injury Lawyer
When receiving a car accident settlement, it’s a good idea to understand the implications. While Texas does not require you to pay taxes at the state level, you may have to at the federal level.
Get the most compensation possible for your car crash. A Houston car accident attorney from The West Law Office, PLLC can assist you with financial recovery. Schedule a consultation with our office today by calling (281) 347-3247 or filling out the online form.
Source:
irs.gov/government-entities/tax-implications-of-settlements-and-judgments
