If you get injured in an accident caused by someone else and achieve a personal injury settlement, your next concern may be regarding taxation. It is important to understand the tax laws that may apply to a settlement or judgment award in Texas. You may need assistance from a Laredo personal injury lawyer to structure your settlement in a way that minimizes your tax liability.
Most Personal Injury Settlements in Texas Are Not Taxed
Most types of financial compensation awarded after a successful personal injury claim in Texas are not subject to taxation. This includes compensation aimed to reimburse the plaintiff (filing party) for medical treatments, health care costs, disability, lost wages, lost capacity to earn, pain and suffering, property damage, and emotional distress.
As a general rule, personal injury insurance settlements and judgment awards granted by the civil courts are not taxable. Various Internal Revenue Codes protect personal injury settlements from taxation. Section 61 and Section 104 of the Code state that amounts paid on account of physical injury are not included in an individual’s gross income for federal tax purposes.
All settlements received in Texas for personal injuries and physical sickness are tax-exempt. This is the case whether the settlement is reached by Laredo accident lawsuit or private agreement, and whether the individual decides to receive the settlement as a lump sum or periodic payments.
Exceptions to the Texas Injury Settlement Taxation Rule
It is important to realize that there are some exceptions to the general rule that precludes settlements from tax obligations. If a personal injury settlement includes any of the following types of compensation, these portions of the final amount received by the victim will likely be taxed as part of the individual’s gross income:
- Punitive damages. Any amount awarded in punitive or exemplary damages under Texas Civil Practice and Remedies Code § 40.011 are taxable, as they are awarded to punish a defendant rather than to make an accident victim whole again.
- Emotional distress. If emotional distress damages are awarded to an individual who did not suffer any type of physical injury or illness but psychological trauma alone, this part of a settlement may be taxable.
- Medical expenses, in some situations. If the injured individual listed medical costs as a tax deduction on a previous year’s tax documents, any amount awarded for medical bills as part of a settlement will be taxed.
- Interest. If interest accumulates on a settlement that the defendant or an insurance company does not pay right away – such as a case that is delayed for months or years – this interest can be taxable and must be reported as income.
Since Texas does not have its own income tax laws, personal injury settlement taxation only depends on federal tax laws. Consult with a Laredo slip and fall accident attorney for individualized tips and advice regarding how your settlement might be taxed.
When to Contact a Laredo, Texas Personal Injury Attorney
A Texas personal injury lawyer can help you handle the tax implications of your settlement or judgment award. Your attorney will understand how settlements are taxed at the federal level and can help you structure your settlement in a way that reduces tax liability as much as possible.
For example, choosing periodic payments over several years instead of a lump sum could reduce your tax liability in the current year. Your Laredo truck accident lawyer will also make sure you do not miss any important tax obligations that could lead to significant penalties down the road.
If you need assistance navigating the taxation of your personal injury settlement in Texas, contact Gonzalez Druker Law Firm. We offer free initial case evaluations from our law office in Laredo and over the phone.