Do I Have to Pay Taxes on My Personal Injury Settlement in Texas?

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Key Takeaway:

You generally won’t pay taxes on a personal injury settlement in Texas, but certain parts—like punitive damages or interest—may be taxed under federal law.

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You finally settled your personal injury claim—now comes the next big question: Will any of that money be taxed?

Texas doesn’t have a state income tax, so you won’t owe state taxes on your settlement. But federal tax law still applies, and certain types of compensation can be taxed depending on how your settlement is structured.

What Parts of a Settlement Are Tax-Free?

Compensatory Damages – Not Taxed
This includes money awarded for:

• Medical expenses

• Lost wages (due to injury or illness)

• Pain and suffering (related to physical harm)

If your settlement strictly covers these losses caused by a physical injury, you won’t owe federal taxes on that portion.

What Parts of a Settlement Can Be Taxed?

Emotional Distress – Sometimes Taxed
If the emotional distress was caused by your physical injury, it’s usually not taxable. But if it wasn’t linked to a physical injury (e.g., caused by workplace harassment or defamation), the IRS may count it as taxable income.

Punitive Damages – Taxed
Punitive damages are not compensation for injury—they’re intended to punish wrongdoing. These are always taxed under federal law, no matter the state you live in.

Interest on the Settlement – Taxed
Sometimes settlements include interest, especially if there were delays in paying it out. Any interest earned is taxable income.

What If You’re Not Sure What’s Taxable?

A personal injury settlement can include a mix of taxable and non-taxable components. If you’re unsure, the best thing to do is speak with your attorney or a tax professional.

In most cases, your lawyer can help structure your settlement to reduce your tax liability and ensure you receive the full benefit of your compensation.

Need to File a Personal Injury Claim in Texas? Call Shaw!

If you’ve been injured due to someone else’s negligence, you could be entitled to compensation for:

• Medical Expenses

• Pain and Suffering

• Lost Wages

• Property Damage

• And More

And yes—we’ll help you understand how taxes may affect your settlement.

Call Shaw today at 800-862-1260 to schedule your free case evaluation with a Texas personal injury lawyer. No fees, no obligations—just expert legal advice.

We look forward to serving you.