In the months after an injury, when the bills are piling up, the idea of a personal injury settlement to pay for your losses can sound too good to be true. The good news is that no, in most cases, personal injury settlements in Georgia are not subject to tax. And, in rare exceptions, you may only owe taxes on the part of your settlement, not the whole thing.
Personal injury laws are already confusing enough as it is. Throw tax laws into it, and it can be confusing even for an expert. Fortunately, our lawyers have lots of experience. So while we can’t go over every unique tax situation, we can give you a general overview of how taxes affect personal injury settlements and how your situation may apply.
Personal Injury Settlements Aren’t Gains
The reason why personal injury settlements are not taxable is simple. The entire idea behind the income tax system is that you pay tax on gains. However, a personal injury settlement is not a gain at all. It’s simply compensation for a loss.
In other words, when the entire court case is said and done, and you’ve gotten your total settlement, legally, you aren’t considered ahead at all, even if you are ahead financially. You’ve simply had your losses made up to you.
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Personal Injury Settlements Are Usually Tax-Free
Generally speaking, your settlement will be tax-free if it is:
- Compensation for physical injuries or physical sickness, defined as “observable, bodily harm”
- Resulting from a traditional tort, meaning a settlement related to a car accident, slip and fall accident, or another unexpected injury
Dog bite claims, defective medical device injuries, and whiplash claims are all examples of the types of cases where your settlement is ordinarily tax-free. In these types of cases, you don’t have to worry too much about your tax situation.
Exceptions Where Personal Injury Settlements Are Taxed
The key to the tax-free situations above is the language about a “physical” injury. Physical injuries can be very broadly defined: internal damage, sickness, infection, and follow-up surgeries are all examples of physical harm.
But this does not extend to purely emotional or psychological injuries in nature. For example, suppose your emotional trauma is related to a physical injury. But if there is no corresponding physical injury, you will owe tax on the amount. There are two other less common situations where your settlement may be taxed:
- Employment-based claims, such as illegal discrimination, where the settlement is for lost wages or back wages. This doesn’t typically apply to injury claims.
- Physical injuries where you already deducted the cost of the injury in a previous tax year. This usually only applies in lawsuits that take place months or years after the initial care happens. If you already wrote the cost of care off as a loss in a previous year, then the compensation you receive will be taxed as a gain.
It’s possible that these situations will only apply to part of your settlement. For example, if you already deducted emergency room costs last year but haven’t yet removed surgery costs from this year.
Punitive Damages and Taxation
According to the Official Code of Georgia Annotated (OCGA) §51-12-5.1, particularly personal injury cases can qualify for punitive damages. Punitive damages get awarded to personal injuries on top of their compensatory damages. While not all cases qualify for punitive damages, those that do will get their punitive damages taxed.
The Internal Revenue Service (IRS) guidelines on settlements and taxability clearly state that punitive damages must get reported as other income. But, don’t worry. Just because you get awarded for punitive damage doesn’t mean the rest of your settlement will get taxed. Only the money you receive for punitive damages will face taxation.
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Legal Fees Aren’t Deductible
Remember, your legal fees aren’t deductible, so you won’t be able to write them off come tax time should your personal injury settlement get taxed. Also, keep in mind that the IRS will still tax any taxable portion of your settlement in the total amount. In other words, say you win $50,000 in a settlement and pay $20,000 in legal fees. You will still get taxed the total amount of $50,000.
This is just a very simple breakdown of a complex topic. Taxes can’t be generalized or summarized in a way that can apply to every situation. If you have any questions regarding how taxation works for personal injury settlements and whether you’ll get taxed on yours, don’t hesitate to reach out to us today.
How Our Attorneys Can Help
An attorney can ensure you file for all the damages available to you in your personal injury settlement. You don’t want to leave anything behind and settle for less than you deserve. An attorney can also speak to the insurance company on your behalf to ensure you don’t get tricked into settling for an amount that may sound great at first blush but is actually more of a lowball offer.
Don’t let taxes deter you from obtaining legal representation. This is playing precisely in the insurance company’s favor. They may try to convince you to take a fast tax-free settlement early that only benefits them and leaves you with scraps. Always fight and negotiate for the compensation that you deserve.
Get in Touch with Our Personal Injury Lawyers Today
John Foy & Associates has some of Georgia’s most experienced and respected personal injury lawyers. If you need help getting financial compensation for your personal injury, don’t hesitate to schedule an appointment with us as soon as possible. Contact us or fill out our online form to get your free consultation today. We are available 24/7.