Compensatory and Punitive Damages: Are They Taxable?

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If you were injured by someone else’s negligence and received damages as a result, you may have questions about how you will be taxed on the money you received in your settlement or award. The term "damages" refers to the amount of money you received as compensation for your injuries and other losses. (Should you accept an insurance company's initial settlement? Click here to read more)

Your Lawsuit

If someone else’s negligence leaves you injured and your claim goes to court, you are the plaintiff – the party who presses charges – and the defendant is the negligent party whom you are pressing charges against. When the court awards you with damages, it can be comprised of two distinct types:

  • Compensatory damages that are intended to compensate you
  • Punitive damages that are intended to punish the negligent party

Whether you will be required to pay taxes on these damages will depend upon the type of damages you are awarded by the court.

Your Compensatory Damages

When the court awards you compensatory damages, the amount relates to actual losses you sustained – that are backed up by evidence, including medical bills and proof of lost wages. Such damages are intended to help you pay for any expenses you incur as a result of the accident.

Compensatory damages can be divided into two categories that include economic and non-economic damages. Economic damages encompass losses that are monetary in nature, including medical expenses, the cost of repairing property damage, and lost wages. Non-economic damages, on the other hand, are awarded "to accommodate for pain and suffering, emotional distress, and any diminishment in the quality of your life post-accident.

Your Punitive Damages

Punitive damages are different; they are not awarded for any loss that you have sustained but are instead intended to serve as a form of punishment for the defendant. Punitive damages are typically reserved for defendants who recklessly disregarded the plaintiff's safety (Read more about the consequences of reckless driving). For example, if the defendant was under the influence of alcohol at the time of the accident, it could rise to this level. Punitive damages are awarded far less often than are compensatory damages because there must be clear evidence that the defendant was willfully malicious and/or was extremely irresponsible in his or her actions.

Still confused on the difference between compensatory and punitive damages? Read this article for more information: Understanding the Difference between Compensatory and Punitive Damages

Taxability Is Complicated

Punitive damages, because they do not compensate for any loss (economical or emotional), are always taxable. Compensatory damages, on the other hand, are not as straightforward. If your damages are for a physical injury that is visible – like a broken bone – they are not taxable. Damages for injuries that are not visible – like chronic headaches – are usually taxable at some level. When it comes to the damages for emotional injuries, things become even more complicated.

RELATED: Is Your Texas Car Accident Settlement Taxable?

If You Have Been Injured by Someone Else’s Negligence, Consult with an Experienced Central Texas Personal Injury Attorney Today

Attorney Brett H. Pritchard at The Law Office of Brett H. Pritchard in Central Texas has the experience, commitment, and knowledge to skillfully advocate for the compensation to which you are entitled. For more information, please contact or call us at (254) 220-4225 today.


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