In general, proceeds from a personal injury claim resulting from an accident are not taxable under state or federal law. Even if a San Antonio personal injury lawyer filed a lawsuit in court prior to reaching a settlement, the proceeds they receive will not be taxed, so long as they will use the settlement proceeds for some sort of legitimate injury-related purpose.
If you’ve gone to trial and won a verdict or negotiated a settlement, the IRS cannot tax you on any money you receive from the settlement or verdict.
The federal income tax statute excludes damages received as a result of personal physical injuries or physical sickness from gross income.
Any damages that are meant to compensate the claimant for missed work, medical bills, emotional distress, pain and suffering, loss of consortium, and attorney fees are not taxable as long as they come from a personal injury or a physical sickness. A physical sickness means a claim for an illness.
For example, if you were exposed to a germ that made you sick, your damages resulting from that illness would not be taxable.
Exceptions to the General Rule
You will be taxed on damages relating to a breach of contract if it is the breach of contract that causes your injury or physical sickness.
Punitive damages are always taxable, but if you have a claim, your lawyer can ask the judge or jury to separate the verdict into compensatory damages (not taxable) and punitive damages. Get details on the different types of damages in a personal injury case.
One other portion of a personal injury verdict that is taxable is interest on the judgment. Most states require the court to add interest to the verdict for the length of time the case has been pending.