Texas does not have a personal income tax, so there is no need to be concerned about claiming any of your personal injury settlement or jury award as income for Texas tax purposes. The only concern is whether you are expected to claim the money as personal income when submitting your federal IRS tax return. Springer & Lyle provides you with some of the information you need to be sure you comply with the relevant law.
Does the Federal Government Tax Your Personal Injury
The IRS code establishes how you are to handle the different aspects of your personal injury award that you receive from a car accident.
Compensatory damages. These are to compensate you for your physical injuries, including pain and suffering, loss of consortium, and any damages solely to compensate you for your physical injuries. These are not taxable and do not need to be claimed as income on your tax return.
Actual compensatory damages include payments for expenses you incur for which a monetary value can be calculated:
- All your medical and hospital bills.
- Ambulance expenses.
- All medical treatment and rehabilitation.
- All necessary medical care.
- Transportation costs of obtaining medical care and rehabilitation services.
- Nursing home care.
- Home health services.
- Domestic services when necessary.
- Medical equipment.
General compensatory damages are for losses you have suffered or will suffer for which an actual monetary calculation is not possible. Examples are:
- Mental anguish.
- Scarring and disfigurement.
- Future medical expenses.
- Permanent impairment.
- Loss of enjoyment of life.
- Loss of consortium.
Lost wages. Lost wages are usually considered part of your compensatory damages and are not taxed by the IRS.
IRC 104(a)(2). The internal revenue code section which discusses the taxation of personal injury settlements and awards is Section 104(a)(2) of the Internal Revenue Code of 1986, as amended.
Punitive damages. Sometimes, you can recover punitive damages in a case founded on negligence. Punitive damages can be awarded when there is grossly negligent conduct. An example would be when the wreck was caused by an intoxicated driver. In those situations, punitive damages can be awarded to punish the defendant as opposed to compensating you for injuries. As such, these damages are taxable.
If questions, ask a certified tax professional. There are exceptions to every rule. Because of this, it’s always best to ask a CPA or tax attorney about the potential taxation of any type of legal settlement.
Contact Springer & Lyle for Assistance
The personal injury attorneys at Springer & Lyle can help you obtain the reasonable compensation you are entitled for your injuries, lost wages, medical expenses, pain and suffering, and other physical damage. Contact us at 940.387.0404 for a free consultation.