Does My Settlement Impact My Taxes?

My favorite part of being a personal injury attorney in Corpus Christi, Texas is when I get to present my client with their settlement check. This is the day they have been waiting for. It’s the day that they are made whole by the insurance company for all the pain and suffering that the client had to endure. While in some cases the clients can never truly be compensated for their injuries, this is the client’s time to feel some sense of closure from this tragic episode in their life.

During settlement, the client may still have a few questions. One of the most common questions that I am asked is, “How will this impact my taxes?” This is a great question and one I’m glad to answer. According to the Internal Revenue Service, or the IRS, they have been as to outline the question of taxability of settlement and judgments.

The law reads under 26 C.R.R. 1.

“Section 1.104-1 Compensation for injuries or sickness. (c) Damages received on account of personal physical injuries or physical sickness—(1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress.”

While most personal injury settlements are not taxable, it is important to consult with your tax advisor before submitting your yearly taxes. Certain computer software programs may ask you for the settlement info so it is important to keep the breakdown that the attorney gives you for your own records.

Here in South Texa, it is important to have an attorney represent you that you know and trust. Herrman & Herrman, P.L.L.C. has been around for decades serving the residents of Corpus Christi all the way down to the greater Rio Grande Valley. We have attorneys on stand-by 24/7 to answer any of your legal needs. As always, our phone and in person consultations are FREE. If we cannot help you, we will be sure to help you find someone who can. If you or a loved one have any questions please be sure to call the office at 361-792-2358 or drop by our Corpus Christi location at 1201 Third Street. Here at Herrman & Herrman, P.L.L.C. we are always putting YOU first!