No, the state of Texas does not tax any portion of a personal injury settlement. However, portions of a personal injury award may be subject to federal tax under the IRS. Whether some of the damages in your personal injury settlement will be taxed will depend on the breakdown of your specific financial award.
Certain damages, like those for bodily injury or pain and suffering, are generally not subject to taxation at any level. The IRS, however, may tax lost wage benefits in certain situations. Punitive damages and interest accrued are also generally taxed at the federal level.
At the end of the day, how your personal injury settlement is structured really matters. That’s one reason why it’s important to hire an experienced Round Rock injury lawyer to help you pursue compensation after a car accident, slip and fall, or loved one’s wrongful death.
Not only will your personal injury attorney help you understand the potential tax implications of a settlement or jury award, but they can also negotiate a recovery that limits your tax liability and puts the lion’s share of your damages in your pocket, not the government’s.
Are Damages For Lost Wages Taxed in Texas?
Texas won’t tax you for the lost wages you’re awarded after an auto accident, dog attack, or construction accident. In the state’s eyes, that money is yours to keep without reduction.
The IRS generally considers all income to be taxable, regardless of its source. There are, however, some exceptions. Under IRC Section 104(a)(2), “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness” is not subject to federal tax.
As long as your lost wages are related to a physical injury or physical sickness, they can be excluded from your taxable income when you file your return. A dedicated personal injury lawyer in Round Rock can ensure your settlement paperwork clearly identifies these physical losses.
The IRS Will Tax Punitive Damages and Interest
Compensatory damages are intended to make you whole, so they’re not subject to taxation at the state or federal levels. Punitive damages, on the other hand, are intended to punish a defendant for extremely reckless or intentionally harmful actions. As such, the Internal Revenue Service considers punitive damages to be taxable income.
If any interest accrues on your personal injury damages before they’re awarded, that will also be subject to taxation on your federal return.
Are Workers’ Compensation Benefits Taxable?
No, neither the state of Texas nor the IRS taxes workers’ compensation benefits. These benefits, which can include money for medical treatment and lost income, are explicitly excluded from taxable income under IRC Section 104(a)(1). However, interest on your benefits would be subject to taxation.
Call a Personal Injury Attorney for Help After an Accident in Texas
The best way to make the most of your personal injury settlement is to make sure the damages are structured properly.
Dow Law Firm understands the potential tax implications of a settlement, and our injury attorneys in Round Rock or in the greater Austin area can help you negotiate terms that limit your liability and put most of your financial recovery in your own pocket.
We offer a free consultation, so contact our personal injury lawyers at (512) 240-9951 for support today.