Tax implications of a personal injury settlement can be confusing. Many victims of accidents find themselves researching, “Are personal injury settlements taxable?” No, in most cases, personal injury settlements in Georgia are not subject to tax withholding. However, there are some exceptions that are important to understand.
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Understanding the Tax Status of Personal Injury Settlements
Personal injury settlements usually aim to make the victim whole, compensating for losses rather than providing a taxable gain. This compensation covers medical expenses, pain and suffering, and lost wages due to physical injuries or sickness. According to federal and Georgia tax laws, a settlement is not taxable if it is compensatory for bodily injuries or sickness.
Compensation for Physical Injuries or Sickness
You don’t pay taxes on personal injury settlements because they are considered compensation for physical injuries or sickness. Settlements typically include compensation for medical bills, pain and suffering, and other costs directly related to the injury. As long as the settlement compensates for observable bodily harm resulting from an accident, it is generally exempt from taxation.
Exceptions
However, not all compensation in a personal injury settlement is automatically free from tax liability.
Here are a few scenarios where part of an injury settlement is taxable:
- Emotional distress or mental anguish without physical injury. If your settlement includes compensation for emotional distress or mental anguish not directly linked to a physical injury, this portion may be taxable.
- Punitive damages. A portion of an injury settlement is taxable if the trial verdict includes punitive damages. Punitive damages punish the wrongdoer rather than compensate the victim for losses.
- Interest on the settlement. Any interest that accrues on the settlement before it is paid is considered income and, therefore, taxable.
- Previously deducted medical expenses. This section could apply if you received a tax benefit from deducting medical costs related to your injury on a previous tax return. If you later recover these expenses as part of your settlement, the IRS requires you to “recapture” this amount, which becomes taxable.
If you have questions about taxes on settlements for personal injury claims in Georgia, speak with a skilled lawyer at MG Law today.
Lost wages recovered through a personal injury settlement can also complicate the tax situation. Generally, if these lost wages relate to the physical injury and your inability to work, they are not taxable. However, if the lost wages are part of an employment-related claim, such as discrimination or wrongful termination, your settlement money may get taxed.
Legal Fees and Their Impact on Your Settlement
It’s important to note that legal fees associated with personal injury settlements are typically not deductible. That means that even if parts of your settlement are taxable, you cannot deduct the costs of securing that settlement, such as attorney fees, from your taxable income. Tax deductions on legal fees still exist for some types of cases, such as sexual harassment or sexual abuse.
Contact a Georgia Personal Injury Lawyer
Given the complexity of tax laws and the nuances of personal injury settlements, consulting with a professional who can provide tailored advice based on your specific circumstances is advisable. If you’re dealing with a personal injury settlement and have questions about whether personal injury settlements are taxable, contact a knowledgeable attorney at MG Law.
If you or someone you know has suffered injuries and you’re unsure about the tax implications of your personal injury settlement, MG Law is here to help. Our experienced team can guide you through the claims process and help you understand legal and tax implications.
Contact our office online or call (770) 988-5252 for a free consultation.
*For tax advice on your individual situation, please contact a tax professional.
Michael Geoffroy’s law practice focuses on auto collisions, premises liability, wrongful death, and catastrophic injury. He stands up for the cause of justice throughout Georgia and on behalf of his clients every day. He is a leader in both the courtroom and the community, having been recognized numerous times for his involvement in each.