Car accident settlements are generally not taxable in Texas.
However, that isn’t to say that you will never have to pay taxes on a car accident settlement in Texas. But in most situations, you won’t be required to pay taxes.
You may be wondering if any portion of your settlement may be taxed, and the answer is that it is possible. Depending on what you receive your settlement for, there could be portions that are eligible to be taxed.
At Harmonson Law Firm, we help car accident victims fight for justice and compensation. Let’s take a closer look at which parts of your settlement could potentially be taxed.
What Does the IRS Say about Car Accident Settlements?
The Internal Revenue Code Section 104(a)(a)(2) excludes from gross income money received in a settlement paid “on account of personal physical injuries or sickness.”
Section 104 does not apply to punitive damage awards. The settlement received must be on account of personal injuries or sickness to qualify, meaning that generally, any settlement money you receive for the following would not be taxable:
- medical bills
- physical impairment
- pain and suffering
Taxable v. Not Taxable Damages
While damages on account of physical injuries are not taxable, emotional distress damages and damages that arise from emotional distress are taxable.
For instance, if settlement money is paid on account of a client’s insomnia or fear of driving, then those items of damages would be taxable. Settlement money paid on account of lost earnings or lost earning capacity could also be taxable.
Settlement agreements also generally involve confidentiality provisions. Unfortunately, the IRS may also tax a portion of your settlement that constitutes payment for confidentiality.
How Can My Texas Car Accident Attorney Help Prevent Further Taxation of My Settlement?
Fortunately, most car accident settlements aren’t taxed by the IRS, but there are some situations in which taxation is unavoidable.
We do our best to make sure our clients receive as much of their settlements as possible.
While there is no surefire way to ensure that a portion of your personal injury settlement will not be taxed by the IRS, there are things that we do to reduce the risk that any portion of our clients’ car accidents settlements is taxed.
- First, we include a provision in the settlement agreement stating that the settlement is only paid on account of personal physical injuries or sickness.
- Second, if the defense requests confidentiality, we add a clause in the settlement agreement that states that no additional money was paid in the settlement for the confidentiality or we assign a very low consideration, say $100, for confidentiality.
In the vast majority of car accident claims that we handle, the entire settlement is solely awarded only on account of personal physical injuries so that there are no tax consequences.
Luckily, in my 16 years of practice, I have never had a client tell me that any part of their personal injury settlement was taxed by the IRS – from the small fender bender settlements to the large 7-figure awards that our clients have received.
The Harmonson Law Firm is Here to Help
Our job as your personal injury lawyer is to get you the best settlement possible to help you with your recovery and moving forward with your life. We also want to reduce the risk that the IRS will tax a portion of your settlement. If you’ve been the victim of a car accident and have questions about how to get the compensation you deserve, contact our El Paso, Texas office to schedule a consultation.