Are Personal Injury Settlements Taxable in Texas?

In a personal injury claim, a settlement means the parties have reached a voluntary agreement that results in the formal dismissal of any further claims. The parties agree upon an amount for the settlement, and terms are memorialized in a settlement agreement. After you have received your deserved settlement, you may be wondering, “Are personal injury settlements taxable in Texas?”

Stevenson & Murray has resolved many personal injury claims for our valued Texas clients, so we can share some insight about settlements and their related tax implications. In general, it’s helpful to speak with an experienced personal injury attorney or a qualified tax professional about the specific tax laws that may impact your own personal injury settlement.

Are Personal Injury Settlements Taxable?

As of 2025, settlements received for personal injury claims are typically tax-exempt. This is true whether the personal injury settlement is reached through a legal claim or a private agreement. Also, settlements are tax-exempt, regardless of whether the injured party wants the settlement as a lump sum or in periodic payments.

In our country, the majority of personal injury settlement awards are, in fact, issued as lump-sum payments. Also, the vast majority of claims for personal injury cases are resolved through settlement, not trial. Recent data shows that about 95% of cases settle before a formal trial.

In general, if you’ve negotiated a personal injury settlement or won a verdict at a formal trial, the federal government doesn’t tax you on that settlement or verdict award. Some federal tax laws may apply to your settlement or judgment award, which you can discuss with a tax professional or lawyer to reduce your tax liability for a settlement.

Does the Federal Government Tax Personal Injury Settlements?

The IRS maintains guidelines to help decide when a personal injury settlement can be considered taxable. Usually, personal injury settlements and awards following civil court judgments are tax-exempt under the Internal Revenue Codes. Specifically, Section 104 and Section 61 note that amounts received for a personal injury claim are not to be included in your gross income for the purposes of federal taxation.

This means a large portion of personal injury damages is tax-exempt, including money awarded to cover medical bills, wage loss, and emotional distress. For more information, speak with a trusted tax professional or licensed attorney.

Does Texas Tax Personal Injury Settlements Under State Tax Regulations?

Generally, the majority of personal injury settlements are not taxed in Texas, as Texas doesn’t have a state income tax. There are some exceptions to this general rule, including:

• Punitive damages. A settlement that includes damages awarded under Texas Civil Practice and Remedies Code § 40.011 is taxable.
• Emotional distress. If emotional distress damages are awarded based only on psychological trauma, this portion of a settlement amount might be taxable.
• Some medical expenses. If you list medical costs on a prior year’s tax deductions, an amount awarded as part of a settlement for medical bills is typically taxed.
• Pre-judgment or post-judgment interest. Any interest added to your settlement award is taxable, as the IRS requires tax on interest.

Consult an experienced tax professional or skilled attorney to discuss how your specific settlement may be taxed.

FAQs

Do I Have to Pay Taxes on Attorney Fees for a Personal Injury Settlement?

You could owe taxes on a portion of your settlement amount before your attorney fees are subtracted. Many attorneys use a contingency fee agreement, which means the attorney is paid a percentage of your settlement award. However, the IRS might still focus on the total amount of the settlement when calculating taxable income. This is a complex area of law, and understanding the correct way to report a settlement for a personal injury claim is critical to avoid IRS issues.

What Are Some Tips for Handling a Settlement’s Tax Implications?

It can feel overwhelming to handle taxes after a settlement, but you can:

• Consult a qualified tax professional.
• Properly structure your settlement (to reduce tax liability).
• Keep detailed records of everything related to your settlement.

To minimize your tax burden, it’s important to pay the correct amount of federal and state taxes and be sure you’re not leaving any money out.

What Are Some Common Myths About Personal Injury Settlement Taxes?

There are several misconceptions about personal injury settlements and whether they’re taxable. It is a myth that all settlements are tax-free, even though much of the compensation isn’t taxed. It’s also a myth that emotional distress awards are never going to be taxable. Although many believe that Texas doesn’t tax personal injury settlements, this is also untrue. Federal law still requires taxation for some parts of a settlement, which you can discuss with a tax professional.

Why Should I Get Legal Advice About a Personal Injury Claim and Settlement?

Legal advice is invaluable because handling a personal injury claim is overwhelming without an attorney. An attorney can significantly improve your case’s outcome. They can apply the law to your situation and explain what your unique settlement could be like. Also, they can work with insurance companies to negotiate a fair settlement amount for your personal injuries and damages.

Regardless of the Taxes, What Types of Personal Injury Case Results Can I Expect?

Every case in Texas is different, and your settlement depends on your unique case. You can recover the full extent of your economic and non-economic losses. Economic losses have a fixed cost, such as lost job benefits and medical bills. Non-economic losses have a subjective value, as they are intangible. They include pain and suffering as well as emotional distress. An attorney can secure all the compensation in your case and maximize your financial recovery.

Contact Stevenson & Murray for Personal Injury Claims

A personal injury attorney from Stevenson & Murray can navigate the taxation issues of your Texas personal injury settlement.  We’re known at the Harris County Civil Courts as being hard-working, professional lawyers.

Our Houston law office is in the Greenway/Upper Kirby neighborhood. We’re six miles southwest of downtown Houston, and we’re right near I-10, I-610, and U.S. 59, with available parking.

Contact us today to set up a consultation with an experienced attorney.