Are Settlements Taxable?

If you got into a car accident, suffered a personal injury, or were involved in any other legal proceeding and won your case and received a settlement, you may be wondering if the money you received will be taxed. The short answer is: it depends.

Will my Personal Injury Settlement be Taxed?

In the majority of cases, this type of settlement money won’t be taxed as federal tax law does not include income from personal injury compensations. Per the IRS, after you agree on an amount with the insurance companies, that amount will not be taxable, regardless of how you came to that number. You will not be taxed for any settlement relating to a personal injury lawsuit, car accident, sickness, or any other claim- the bottom line being that claims aren’t taxable under Texas law.

Are There Special Circumstances?

If you receive a settlement as a result of a breach of contract lawsuit that involves some sort of personal injury, your settlement will be taxed. Settlements that you receive based on emotional or mental damage are also taxable. The other major circumstance where your settlement money is taxable is when it comes to punitive damages. Punitive damages are meant to serve as a punishment to the defendant if their behavior is deemed extra harmful. If found guilty, punitive damages is the money paid to the plaintiff from the defendant. Normally, the court will decide the amount the punitive damages will be. When reporting punitive damages to the IRS, they should be filed under “Other Income” on line 21.  

What are the Rules Around Punitive Damage?

There are caps to the amount of punitive damages that can be assigned, hence making caps for the amount of taxes you’ll have to pay on them. While the rules are different in every state, in Texas, the punitive damages cannot be more than twice the amount of economic damages, plus the amount equating to non-economic damages.

How Can an Attorney Help Me?

At Jesse Hernandez, we do our absolute best in making sure you have to not only pay the least amount of punitive damages possible if you must pay them, but if you receive them, that they are as least taxed as possible. While we do not have control over the IRS’s standards, we do have control over helping you win your case. The settlement process can be very confusing and without proper representation and guidance, you won’t be set up for success. If you’re seeking a personal injury lawyer by Austin Texas, don’t hesitate to contact us today.

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