Are Settlements From Auto Accidents Taxable in Houston?

The hours, days, and weeks following a car accident can be overwhelming and disorienting. Suddenly, you must cope with your physical recovery and navigate employment challenges, deal with interruptions to your daily activities, and address the costly medical bills that are accumulating rapidly. It’s natural to experience stress and anxiety during this chaotic and challenging time. However, you do not have to face this difficult period on your own. Enlisting the guidance of a trusted and compassionate Houston personal injury lawyer is the best way to ensure that you maximize your settlement offer and secure the compensation you need to support your recovery. Many accident victims want to know whether personal injury settlements are subject to taxation. Let’s take a look at how taxes affect settlement offers and what strategies you can use to maximize the amount of compensation you receive following your painful injuries.

Understanding the Types of Damages in Personal Injury Cases

When you suffer an injury in an accident caused by another party’s reckless or negligent actions, you have the right to seek compensation to help you cover the costs stemming from the incident. Compensatory damages refer to the funds awarded to the victim in a lawsuit. Texas recognizes two types of compensatory damages: actual and general.

Actual Compensatory Damages in Texas

Actual damages aim to assist the injured party with the costs incurred by the injury. For instance, medical bills, hospital balances, physical therapy costs, ambulance expenses, rehabilitation costs, and lost wages are all forms of actual compensatory damages. Actual damages are relatively simple to calculate, as the amount requested corresponds to the outstanding balances the injured party owes. With the help of your personal injury attorney, you can submit medical bills, receipts, and other documents to support your claim and demonstrate that the at-fault party’s negligent actions directly resulted in these costs.

General Compensatory Damages in Houston

Texas courts recognize that an accident impacts the victim in multiple ways. Physical injuries are just one result of the incident. Other negative consequences include mental anguish, loss of enjoyment of life, and other outcomes that do not carry a quantifiable price tag. Your auto accident lawyer can help you determine a fair estimate for general compensatory damages.

Tax Deductible Settlements in Texas

In general, the compensation an accident victim receives for compensatory damages is considered tax deductible. The Internal Revenue Service (IRS) will not tax you on the compensation you received in a personal injury settlement or verdict. Essentially, the award you receive will not be subject to taxation, as long as those damages are tied directly to the accident or physical injury. Additionally, the financial settlement for car or vehicle damage resulting from the accident is considered tax deductible, as is any reimbursement you receive for vehicle repairs stemming from the at-fault party’s negligence.

When Settlements May Be Considered Taxable

It’s important to note that there are some instances where auto accident settlements may be subject to taxation. When it comes to claims of lost wages because your injuries prevented you from working during your recovery, you may only recover the net after-tax amount of your claim. Since your original income is taxed, the financial settlement you recover to make up for your lost income is also taxable. Additionally, punitive damages are typically taxable. Punitive damages refer to monies the court orders the defendant to pay as punishment for actions that are egregiously negligent or reckless. If the court compels the at-fault party to pay punitive damages, you can expect this amount to be taxed before it is awarded to you.

Furthermore, any compensation you receive for emotional distress may be considered taxable under IRS regulations. Although pain and suffering refer to harder-to-quantify negative consequences directly caused by the accident, emotional distress refers to long-term conditions that may not correspond directly to the accident itself. For instance, clinical depression that occurs right after the accident will likely be considered pain and suffering (the compensation for which will not be taxable). In contrast, a general fear of driving that develops months after the accident is more likely to be considered emotional distress (the compensation for which is taxable).

Trusted Legal Guidance to Support Your Recovery

Coping with your physical recovery after suffering an auto accident injury is stressful enough. However, there are several other challenges you face during this turbulent time. When you enlist the help of an experienced and caring Houston personal injury lawyer, you can move forward with greater certainty and confidence. While you focus on your physical recovery, your attorney will work hard to maximize your settlement and secure you the compensation you need to rebuild your life.

Reach out to DeHoyos Accident Attorneys, PLLC, today at (832) 745-4878 to speak with a dedicated and caring Houston personal injury lawyer.