If you’ve been injured in a car accident, slip and fall, or other accident: you may be awarded cash compensation to pay for your medical bills, loss of earnings and other damages — commonly referred to as a personal injury settlement. We often get asked around this time: “Are Georgia Personal Injury Settlements Taxable?” It’s a great question. A personal injury lawyer can be pivotal in maximizing your total settlement amount, as well as helping you avoid paying any unnecessary taxes on it after the fact. In this post, I’ll help you understand which penalties and taxes might be assessed against your personal injury settlement.
When you ask your attorney if a personal injury settlement is taxable or not, they will tell you “it depends” because giving a simple answer would be sloppy and fails to consider the many nuances of the law. The Whether or not you’ll have to pay taxes on your personal injury settlement depends on a few factors, including the type of damages awarded and what led to your injury in the first place.
In general, you won’t pay taxes on most personal injury settlements. Income from an accident that was not related to work is not taxable.
The Internal Revenue Service (IRS) defines taxable income as “all income from whatever source derived,” but there are exemptions for some types of damages that you may receive in a personal injury claim or lawsuit.
There are two different types of compensation that may be awarded in a personal injury case: compensatory and punitive damages. Generally only punitive damages are taxed.
Compensatory damages help cover the expenses associated with a victim’s injuries. They aim to make you whole. You can think of compensatory damage awards as reimbursement for your misfortunes. It’s similar to receiving a refund on something you already paid for — not taxable income because it wasn’t new money in your pocket.
General damages are awarded to victims of a personal injury claim when no monetary value can be assigned to specific losses. We call these non-economic damages. These include compensation for pain and suffering, loss of consortium, disfigurement or disability, loss of ability to perform household chores and other losses that cannot be quantified with exact dollar amounts.
It is generally believed that these damages are not taxable because they compensate a plaintiff for something that cannot actually be sold on the market.
Special damages are awarded in a lawsuit to compensate a victim for expenses incurred due to an injury. Special damages refer to compensation received for losses that can be quantified with exact dollar amounts in terms of lost wages (more on that later), medical expenses, and property damage. These damages are also typically tax-free because they simply reimburse victims for what they have already paid out of pocket to cover these costs.
Punitive damages are awarded in civil cases when the defendant’s conduct was especially egregious. The purpose of punitive damages is to punish the defendant, so the courts do not consider punitive damages to be compensation for injury.
“Punitive damages may be awarded only in such tort actions in which it is proven by clear and convincing evidence that the defendant’s actions showed willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.” O.C.G.A. § 51-12-5.1
Because punitive damages are designed to punish the defendant, you must report them as “Other Income” on your income tax forms.
Since a personal injury lawsuit can take years to settle, interest may accrue on the settlement during that time. The interest portion of a settlement is taxable. For example, if you receive a $100,000 settlement and $10,000 of interest accrued over the years, then $10,000 of your settlement is taxable. However, if there was any interest paid before judgment or before the agreement to settle was reached, that amount is not taxed.
Lost wages are earnings that were never received as a result of a personal injury. This includes lost wages the Plaintiff would have received while they recovery from their injuries, loss of earning potential if they had to take a lower paying job due to their injuries, and/or loss of future earnings if they are unable to work anymore due to their injuries. Any income you receive as a result of the court awarding you compensation for your lost wages is taxable income to the IRS.
It’s an unfortunate fact that in the United States, accident victims are often required to pay taxes on compensation they receive as a result of their accidents. Thankfully, there are some exceptions to this rule. If you’ve recently been involved in a personal injury accident, it’s best to consult with an experienced local attorney well familiarized with the many nuances involved with personal injury settlements and how they will be taxed (or not). This will hopefully provide well needed clarity on this complex issue and alleviate concerns over tax implications that could otherwise detract from your well deserved settlement.
If you ever have any questions about your personal injury case, do not hesitate to reach out to us!