Most car accident victims are relieved and excited when they receive their settlement or court award for car accident damages like medical expenses, lost income, and pain and suffering. Often, it isn’t until later that they worry about the possible tax implications of their Texas car accident settlement.
When a settlement comes through after a car accident claim, it eases the financial hardship often associated with serious injuries that require expensive medical treatment and time away from work during recovery. Some car accidents cause permanent partial or total disability with life-long implications for the injury victim. This may result in large settlement payments from the at-fault driver’s insurance, but many car accident victims ask, “Is my car accident settlement in Texas taxable?”
Most Portions of a Car Accident Settlement are not Taxable
Texas has no personal income tax, but federal regulations require taxes on income for Texas residents. Fortunately, the majority of typical categories of a car accident settlement are not taxable. For instance, any actual compensatory damages serve as direct compensation for an injury victim’s expenses and physical harm such as:
- Medical costs
- Future medical care expenses for injury-related care
- Related expenses such as transportation costs to appointments, medical equipment, and home care
- Pain and suffering
- Physical disability
- Disfigurement
Settlement amounts for any of the above are untaxable since they are not considered income. The only exception occurs when an injury victim claims their medical expenses as a tax deduction the year they receive treatment and then receives a settlement for the full amount the following year. In this case, they must pay taxes on the part of the settlement that covers the medical expenses you claimed in the deduction.
Is Any Part of a Texas Car Accident Settlement Taxable?
The tax-exempt status of a settlement doesn’t apply to all portions of the settlement. If a car accident settlement includes an amount for lost income and future income loss, that amount replaces taxable income so you must pay taxes on that amount. In some cases, it can be awarded in a structured payment amount rather than a lump sum to minimize the percentage you’ll have to pay.
Non-compensatory damages and settlements for non-physical injuries remain taxable. This includes any of the following:
- Settlements for emotional damages like trauma, PTSD, or anxiety/depression
- Punitive damages
Punitive damages are not considered compensation for a victim’s damages but instead serve as punishment and deterrent to a drunk driver or an egregiously reckless driver, such as one who committed a road rage incident resulting in an accident. Punitive damages are paid to the victim but are taxable since the amount doesn’t compensate them for their economic or physical damages.
You can learn more about the different kinds of damages in car accident claims here.
How Can I Minimize the Taxable Portion of My Car Accident Settlement?
Experienced accident attorneys will structure the settlement in a way that places much of the compensation into untaxable categories to minimize taxation. They may also seek to eliminate any taxable categories by seeking larger amounts in untaxable categories of the settlement.
If you’ve been injured and experienced significant damages in a car accident in Texas, a Plano car accident lawyer can advise you on any tax implications for your settlement.