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Are Personal Injury Settlements Taxable in Texas?

Posted on October 29, 2022

If you received a settlement from a personal injury claim in Texas, your next question may be whether there will be any tax implications. Although there are some exceptions, for the most part, personal injury settlements are not considered taxable income.

What Portions of My Personal Injury Settlement Are Not Taxable in Texas?

The following portions of a personal injury settlement are nontaxable income in Texas:

Medical Expenses

If you did not take any deductions on your tax returns for accident-related medical expenses, then the compensation you recover for your medical bills is not taxable income.

Property Damage

The compensation you recover to repair or replace property is not taxable unless the amount you receive exceeds the property’s adjusted basis (net cost of an asset). In that case, taxes must be paid on the excess amount.

Pain and Suffering

Most personal injury settlements also include compensation for physical and emotional pain and suffering caused by injuries. This type of compensation is typically not taxable. However, it is a bit more complicated. Physical pain and suffering compensation is not taxable income as long as it is linked to a physical injury. However, if part of your settlement is for emotional distress and you did not suffer a physical injury, then the compensation is taxable.

What Portions of My Settlement Are Taxable in Texas?

The following types of compensation may be taxable:

Wage Reimbursement

Compensation for current and anticipated lost income while you recover is taxable under all circumstances. Like a work paycheck, you must report it on your tax return, even when it is from a settlement.

Medical Expenses

If you made itemized deductions on a prior tax year for medical bills that now make up a portion of your personal injury settlement, then you will owe taxes on that compensation. In addition, if part of your settlement is for medical expenses across multiple years, you will have to pay pro-rata taxes on the total amount of medical expenses being reimbursed for each year they were listed as deductions.


Since personal injury cases take time to resolve, interest is often added on top of a personal injury settlement for the undesirable waiting period. If you recovered any interest on top of your lump sum, it is taxable income.

Punitive Damages

Punitive damages are sometimes included in a personal injury settlement if the defendant exhibited extremely reckless or egregious behavior. If you recover this type of compensation, you will have to pay taxes on it.

Attorney Fees

Personal injury attorneys typically take a third of a settlement as their contingency fee. However, that portion will not be deducted for tax purposes. In other words, it will be as if you received the entire settlement—for example, suppose you recover $100,000, and your lawyer keeps $33,000. You might think you only owe taxes on portions of the $67,000 you received, but you must still pay taxes on any part of the $100,000 settlement that is taxable income.