The IRS cannot tax you on any monies you won in compensatory damages in a settlement or jury verdict of a car accident claim or lawsuit in Texas involving your physical injuries directly. What this means, is if it has something to do with your injuries, you are not going to pay taxes on it. There are some exceptions. The tax exemption extends to damages as well. Such non-taxable damages can include; emotional distress, pain, suffering, medical bills, or attorney fees as long as all these damages are tying into your personal injury or illness.
Whereas the exceptions to the rule usually apply to additional monies recovered besides money which is to be paid directly to others. For instance, if a plaintiff recovers punitive damages, lost wages, or any settlement or verdict you get purely of emotional damage are taxable.
Lost wages are simple to understand why the IRS is able to tax this amount. You are not to fully receive the gross amount of your lost wages while you normally would be paying a tax on your income should you have been working the entire time. You may recover your gross income amount, but your income will be taxed following the settlement or verdict to give you your net income.
There Are Parts of a Car Accident Settlement That are Taxable
Punitive damages are a very controversial taxable piece to the legal process. While some people feel punitive damages deserve to be tax free as they can be considered payments to ensure negligence is not treated so lightly again, others feel taxing proper compensation people are rightfully deserving of is unethical. Regardless of your views on the matter, punitive damages are currently taxable in the state of Texas.
Other settlements outside of injury cases like an award for breach of contract involving injuries with damages may be taxable as well. If you are making two different claims against the defendant, one involving personal injury and the other being breach of contract or another form of lawsuit, separating them is your best bet in ensuring you are not taxed on your personal injury awarding. Instead of allowing the IRS to see both lawsuits as a lump sum, separating the lawsuit or claim would be the best option in order to secure all funds which are not legally taxable, with personal injury claims, out of the legally taxable recoveries from another lawsuit.
Angel Reyes Can Help
If you have any more additional questions about your car accident lawsuit settlement or jury verdict and taxes on a potential case you may be seeking to pursue, call our team to have those questions answered. You can reach our team at Reyes Browne Reilley at (214) 526-7900 to have all questions answered immediately 24/7.