Are Personal Injury Settlements Taxable in Georgia?

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It’s completely normal to wonder, and worry, about any potential income tax liabilities you might have following a large personal injury award. After all, you’ve just gone through maybe the worst period of your entire life. You may never be able to go back to the way things were. And you have significant medical bills that must be paid.

Naturally, you want to keep as much of your settlement as possible. We don’t blame you.

Some types of damages are taxable, while others aren’t. The good news is that, in a typical personal injury case, a significant portion (and sometimes all) of the settlement award will be tax free. However, there’s still a chance you will owe at least some taxes.

An experienced personal injury lawyer can help you not only maximize your total settlement amount, but also help you avoid paying any unnecessary taxes on it after the fact. In this post, we’ll break down the components of a typical personal injury settlement and consider the tax liabilities of each.

What Is Not Taxable: Compensatory Damages

Compensatory damages are intended to “make you whole” for losses that are directly related to your personal injury. You can think of compensatory damage awards not as taxable income or “gains,” but as reimbursement.

A classic example of compensatory damages would be repayment for past and future medical bills. Other economic losses, like lost wages, wage-earning potential, long-term personal care needs, and costs to modify your living environment are also considered compensatory damages and are tax free as long as they related to your physical injury claim. (Lost wages would be taxable in non-injury cases like employment discrimination or defamation, but this is typically not the case for personal injury.)

For this reason, compensatory damages awarded in personal injury settlements are not taxed either by the federal government or the state of Georgia.

Again, the logic here is that, if you’ll need to pay $300,000 in medical bills and other direct costs (for example), it wouldn’t be fair to have to pay taxes on the $300,000 you receive in compensation. That $300,000 is not a “gain” for you, and taxing it would leave you with less than the full amount you need to cover those expenses.

What About Pain and Suffering (and Other Non-Economic Compensatory Damages)?

You might ask: What about things like pain and suffering, emotional distress, mental anguish, reduction in your quality of life, or other types of personal losses that don’t come with an obvious price tag?

The good news is that any type of compensatory damages, including non-economic damages, are non-taxable if they originate from a physical injury or physical sickness. In a personal injury case, that’s going to be true most of the time.

Mental anguish, emotional distress, or other non-economic damages that are not tied to a physical injury or condition would be taxed. But that scenario typically only applies to other types of civil cases unrelated to personal injury, such as employment discrimination or breach of contract.

Exception to the Rule: Previous Tax Deductions

Things might get tricky when you already deducted any out-of-pocket medical expenses on a previous tax return. This might happen if your injury occurred in one year, but you don’t receive your settlement or jury verdict until a later year.

For example, let’s say you were injured in 2020 and paid $50,000 in medical costs out of your own pocket. When you filed your taxes for 2020, you took an itemized deduction for those costs, which reduced your taxable income for that year.

If you then win a personal injury settlement or trial verdict in 2021 or later, you will need to pay taxes on $50,000 worth of compensatory damages that you are awarded.

What Is Taxable: Punitive Damages and Interest

In most personal injury cases, compensatory damages make up most of your settlement. However, there are some additional damages that the IRS considers “taxable income.” Let’s explore two of the most common taxable damages now.

Punitive Damages

Punitive damages are very different from compensatory damages. They are meant to punish an at-fault party for malicious or especially reckless behavior, as well as discourage others from making similar decisions. If you receive punitive damages, it will typically be part of a jury award (not a settlement).

While punitive damages are paid to the plaintiff just like compensatory damages, they are not meant to reimburse any specific losses. They go “above and beyond” the amount needed to make the plaintiff “whole.”

For that reason, punitive damages must be reported as “Other Income” to the Internal Revenue Service, and you will owe taxes on them.

Interest Payments

In Georgia (as in most other states), if you file a personal injury lawsuit, go through the trial process, and get a jury verdict, the court will add a certain amount of interest to the final award based on the amount of time that passes between filing suit and receiving payment. The goal is to penalize an at-fault party for unnecessary delays, as well as to encourage settling out of court.

If the jury awards you damages, you should be paid this interest. However, it will be taxable as “interest income” on your 1040.

Does It Matter Whether You Settle Out of Court or Win a Trial Verdict?

In terms of what types of damages are taxable vs. non-taxable, the answer is no. Whether you are compensated through a settlement or jury verdict, the tax implications will be the same.

That said, because some types of damages are taxable and others are not, it’s important to get a complete and accurate breakdown of the full settlement, which clearly indicates the relative proportion of different types of damages.

Even if you’re otherwise happy with the total value of your compensation, if the portion of the award attributed to compensatory damages is undervalued, you could end up paying more in taxes than you should.

How a Lawyer Can Help You Maximize Your Settlement (and Minimize Your Tax Burden)

It’s important to remember that insurance company claims adjusters do not have your best interests at heart. They are trying to settle your case quickly and cheaply, end of story. Ensuring you get full compensation for all your losses is not their top priority, and the amount you might owe to the IRS after the fact is certainly not their problem.

That’s why receiving sound legal advice, even in the early stages of your case, can be hugely beneficial. A personal injury attorney can help you figure out not just “how much” your case is worth, but break it down accurately so you don’t end up paying more than you owe in taxes on the back end.

Initial settlement offers from the insurance company are usually for far less than what your case is truly worth. And most people underestimate the true long-term costs of their injury—not just ongoing medical bills, but wage loss, physical and occupational therapy, transportation considerations, home care, adaptive technology, and so much more. Without a careful and thorough investigation before accepting any claim, you run a significant risk of leaving a lot on the table.

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References

Internal Revenue Service. Publication 4345 (Rev. 9-2019): Settlements Taxability. Retrieved from https://www.irs.gov/pub/irs-pdf/p4345.pdf

O.C.G.A. § 15-12-14

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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