Will I Be Taxed on My Personal Injury Settlement in Texas?~3 min read

Most personal injury settlements in Texas are not taxed when they compensate you for physical injuries or physical sickness. Certain parts of a settlement can be taxable, such as money for lost wages, interest, or emotional distress not linked to a physical injury and, depending on whose claim it is. Understanding how each part of your settlement is categorized helps you know what you may owe at tax time.

Compensation for Physical Injuries

Money you receive for a physical injury or physical sickness is usually not taxed. This includes compensation for medical bills, pain and suffering related to a physical injury, and lost earning potential tied to your injury. The IRS generally treats these payments as nontaxable because they are meant to make you whole after being harmed. If the settlement is directly connected to a physical injury, you usually do not pay taxes on that portion.

When Settlement Money May Be Taxable

Some parts of a settlement can be taxable depending on what the money represents. Payments for lost wages may be taxed because they replace income that would have been taxed if you had earned it. Interest added to a settlement is also taxable. This type of interest is sometimes added under Texas law to account for the time between the injury and the final resolution of the case. Emotional distress damages can be taxable when there is no related physical injury. Punitive damages, which punish the at fault party, are always taxable.

How the Settlement Agreement Affects Taxes

How the settlement is structured matters. The agreement should clearly state what each portion of the payment represents. When your settlement spells out what is for medical expenses, physical injuries, lost wages, or other categories, it helps prevent confusion later. Working with an attorney allows you to pursue a settlement that reflects your situation and is supported by records and documentation.

Why Legal Guidance Matters

Personal injury law and tax rules can be confusing when you are trying to recover from an accident. An attorney can help you understand how different parts of your settlement may be treated for tax purposes and answer questions about what to expect before you receive the funds. You do not have to figure everything out on your own.

Call Springer & Lyle

If you have questions after a personal injury, Springer & Lyle can guide you through the process and help you understand what your case may involve. Our experienced team will take the time to learn your story, explain your options, and pursue the compensation you deserve. Call 940-387-0404 to schedule a free consultation.

Springer & Lyle is located at 1807 Westminster, Denton, Texas 76205.

Frequently Asked Questions

Is my entire personal injury settlement tax free?
Most of the settlement is tax free when it relates to physical injuries. Portions such as lost wages or punitive damages may be taxed, depending on the circumstances and specific language in the settlement agreement.

Are medical expense reimbursements taxed?
They are usually not taxed unless you previously claimed those expenses as deductions on your taxes.

Are emotional distress damages taxed?
They may be taxed if the emotional distress is not connected to a physical injury.

Do I need to report my settlement on my tax return?
You may need to report certain parts. A tax professional can help you understand and decide what applies to your specific situation.