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Are Personal Injury Settlements Taxable in Georgia?

Feb 13, 2024 - Personal Injury

Generally speaking, personal injury settlements aren’t taxable in Georgia, but there are exceptions to this, such as punitive damages and compensation awarded without a physical injury.

That said, it’s important you’re fully aware of the ins and outs of the different parts of your personal injury settlement.

Are personal injury settlements taxable in Georgia?

Fortunately, most personal injury settlements in Georgia are not typically taxed, offering significant relief to recipients. In rare instances, tax obligations may arise. Still, they often pertain only to specific portions of the settlement rather than the entirety, providing individuals with a sense of financial security and peace of mind.

Are bodily injury settlements taxable?

In general, bodily injury settlements are not taxable in most cases. So, are compensatory damages taxable? Compensatory damages awarded for physical injuries or sickness are typically not subject to taxation, providing a significant sense of relief to recipients who are already grappling with the aftermath of their injuries.

Compensatory damages awarded in personal injury cases aim to compensate the plaintiff for actual financial losses incurred due to the injury and so are exempt from federal income tax.

However, it’s essential to note that while compensatory damages are not typically taxable at the federal level, state tax laws may vary, especially when considering personal injury vs bodily injury. Therefore, it’s advisable to consult with a tax professional or attorney to understand the specific tax implications of compensatory damages in your jurisdiction.

While we don’t offer tax advice as such, contact us today if you need to file a personal injury claim in Georgia

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When is a personal injury award taxable?

Navigating the tax implications of personal injury compensation requires an understanding of various factors, including the nature of the case, the types of damages awarded, and whether the settlement exceeds the cost of losses.

While federal taxation rules apply broadly, nuances exist at the state level, making it crucial to consider state-specific regulations. 

Here’s an overview of key considerations:

Are personal injury awards taxable by the federal government?

Under federal tax law, compensatory damages awarded in a personal injury claim are typically not taxable. These damages are intended to compensate the plaintiff for losses incurred due to physical injuries, medical expenses, and emotional distress.

However, punitive damages, awarded to punish the defendant for particularly egregious conduct, are generally considered taxable income by the federal government. This distinction is important to note, as punitive damages and interest are not intended to compensate for losses but rather to deter similar behavior in the future.

Understanding this distinction is crucial, especially in understanding when a personal injury settlement is taxable by the IRS, as it may affect the overall tax implications of the settlement. This is backed up by Georgia Code § 51-12-5.1 on punitive damages.

In most cases, personal injury compensation related to physical injuries or sickness are exempt from federal income tax. This exemption applies to damages for medical expenses, pain and suffering, and lost wages resulting from the injury.

Additionally, any interest income on a personal injury award while it is held in an investment account or otherwise is subject to federal income tax. It’s important to report this interest income accurately to ensure compliance with federal tax laws.

Are pain and suffering damages taxable?

Pain and suffering damages aren’t taxable as long as they are awarded in conjunction with damages for a physical injury.

In contrast, pain and suffering settlements are taxable if they’re awarded without compensation being awarded for a physical injury.

For example, if you’ve been injured in a car accident and offered settlement money for pain and suffering BUT you didn’t have any physical injuries, then you’ll be taxed on that compensation from your personal injury lawsuit.

Consulting with tax professionals or experienced Georgia personal injury attorneys can provide valuable insights and guidance tailored to the specific circumstances of each case.

Seeking a free consultation in the state of Georgia? Our personal injury law firm can help you with these concerns. Contact us today for a free consultation, let us help you get the compensation you deserve and get as much of your settlement as possible.

Exceeding cost of losses

In cases where a personal injury award surpasses the direct costs incurred by the plaintiff, additional considerations regarding taxation come into play. Specifically, if the awarded amount exceeds the actual expenses and losses related to the injury, you may pay taxes from the surplus and be subject to taxation as income.

This scenario is particularly relevant when punitive damages or other portions of your settlement are allocated for reasons not related to your physical injury or physical sickness.

While compensatory damages aimed at reimbursing medical expenses, lost wages, and other tangible losses are typically not taxed, any excess amount designated for punitive damages or non-injury-related purposes may be deemed taxable income.

Understanding the potential tax implications of surplus awards is crucial for plaintiffs seeking to maximize their after-tax recovery.

Get in touch with a personal injury lawyer in Georgia today

No matter your tax situation, having an experienced attorney on your side, such as a Lawrenceville personal injury lawyer, is essential to advocate for your legal rights.

With that in mind, contact us today for a free consultation on your personal injury situation. We’re available 24/7.

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Key takeaways on tax on injury settlement

As you can see, the answer to, “are settlements taxable in Georgia?” isn’t a simple yes or no answer.

While you always need to consider both federal and state income tax laws when evaluating the taxability of accident or injury settlements, in the case of personal injury settlements, the IRS and Georgia are aligned.

Special damages, such as medical bills and lost wages, are generally not taxable. Conversely, general damages, like pain and suffering, may be subject to taxation if they aren’t accompanied with a physical injury.

Any surplus amount as part of your settlement or verdict, particularly those designated for punitive damages or purposes unrelated to the injury, may potentially be classified as taxable income. It’s essential to carefully assess the allocation of settlement proceeds to mitigate tax liabilities effectively.

No matter your situation, it’s essential to contact an experienced personal injury lawyer to help you navigate your next steps after a personal injury.

Additional reading: personal injury statute of limitations in Georgia