In most cases, you do not pay taxes on money you receive as a settlement or jury award for a personal injury claim in Texas. Federal tax law exempts payments made as compensation for losses due to personal injury or illness, except for punitive damages, which are rarely awarded.
Meanwhile, Texas does not have personal income taxes, so the state does not tax personal injury settlements or judgments.
Troy A. Brookover, a seasoned personal injury attorney in San Antonio has secured millions of dollars in settlements and jury awards for people harmed in collisions and other accidents. While no case outcome is guaranteed, attorney Troy Brookover has the experience to handle the legal complexities of the toughest personal injury cases.
Federal Tax Implications
All income in the U.S. is subject to federal taxation unless it is specifically exempted by the Internal Revenue Code (IRC).
IRC Section 104, part of federal tax law, excludes multiple types of compensation paid for injuries and sickness from taxable income. The exclusion includes the amount of any damages (other than punitive damages) received by lawsuit or settlement agreement and, whether as lump sums or as periodic payments due to physical injuries or sickness.
Reg. Section 1.104-1(c) defines damages received on account of personal injuries or sickness as an amount received through a lawsuit or through a settlement agreement entered into in lieu of trying a case in court.
In Commissioner v. Schleier, 515 U.S. 323, 329-30 (1995), the Supreme Court of the United States (SCOTUS) said:
Assume that a taxpayer is in an automobile accident, is injured, and, as a result of that injury, suffers medical expenses, lost wages, and pain, suffering, and emotional distress that cannot be measured with precision. If the taxpayer settles a resulting lawsuit for $30,000 and if the taxpayer has not previously deducted her medical expenses, the entire $30,000 would be excludable under §104(a)(2).
Some maintain that damages received for lost wages in a personal injury claim are subject to federal taxes. But the opinion in the case cited above states that:
(T)he recovery for lost wages is also excludable as being on account of personal injuries, as long as the lost wages resulted from time in which the taxpayer was out of work as a result of her injuries.
Further, Section 104(c)(1) says the phrase “other than punitive damages” shall not apply to punitive damages awarded in a wrongful death action.
Exceptions to Taxability
In Commissioner v. Schleier, the Court says that the taxpayer’s settlement would be entirely excluded from taxes if the taxpayer has not previously deducted medical expenses. IRC Section 213 allows taxpayers to deduct medical expenses from their income taxes. But we don’t get to deduct the same expense twice.
If you were to be injured one year and deduct your medical expenses for that injury from that year’s taxes, any compensation you received in a subsequent year from a lawsuit settlement or award would not be exempt from taxes. You would need to report damages received for medical expenses as taxable income.
If part of a settlement or award is for medical expenses you paid during more than one calendar year, you would allocate part of the damages for medical expenses to each of the years you paid medical expenses.
If you receive compensation from a personal injury lawsuit or personal injury settlement, Law Offices of Troy A. Brookover would advise you to confer with a qualified tax adviser or accountant about your potential tax obligations.
Rare But Taxable: Punitive Damages in Texas
In Texas, a jury may award exemplary damages (also known as punitive damages) in a personal injury case to punish a defendant for outrageous conduct or extreme negligence and to deter similar behavior. Punitive damages are rarely awarded because they require a high standard of proof and a unanimous jury.
Chapter 41 of the Texas Civil Practice and Remedies Code says a jury can only award exemplary damages after it has awarded damages for medical expenses, lost wages, and pain and suffering. The jury must find that the plaintiff has proven with clear and convincing evidence that the harm the defendant inflicted upon the plaintiff was the product of malice, gross negligence, or fraud.
A jury must also vote unanimously to award exemplary damages and must unanimously agree on the amount it awards. Texas caps punitive damages at the greater of:
- $200,000, or
- Two times the amount of economic damages awarded plus the amount of non-economic damages awarded, not to exceed $750,000.
However, the damages cap does not apply to cases involving any of 18 major crimes, including murder, kidnapping, sexual assault, injury to a child, injury to an elderly individual, injury to a disabled individual, and intoxication manslaughter, which may be charged in drunk driving accidents that cause death.
Punitive damages, which are taxable, should be reported as “Other Income” on a federal tax return Form 1040, Schedule 1, Additional Income and Adjustments to Income.
Do You Have Specific Questions? Contact Our Law Firm Today
Reach us today to learn if you have to pay taxes on personal injury settlements. Contact us online or at (210) 226-2000 for a free, no-obligation consultation. We will do our best to help you and clarify any doubts.
