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Are Personal Injury Settlements Taxable in Georgia?

If you are pursuing or collecting a settlement for a personal injury claim in Georgia, you might wonder about the tax implications. You have likely suffered a substantial financial setback and understandably want to retain as much of your settlement as possible.

Here in Georgia, some parts of your personal injury settlement are taxable, and some are not. A sizable chunk of your settlement money should be tax-exempt, but there is a possibility that you will have at least some tax liabilities.

If you have further questions or need help pursuing the money you deserve after an accident that was not your fault, contact a personal injury attorney at Kevin A. Adamson, P.C. We can review your case and help you understand your legal and financial options in a free consultation.

What Kinds of Compensation Are Generally Available in Personal Injury Lawsuits?

When you file a personal injury lawsuit in Georgia, you can seek compensation for the following losses:

  • Compensation for economic losses – This type of compensation is meant to reimburse you for actual, measurable costs you incur due to physical injuries. Compensation for physical injuries often includes medical expenses, including hospital visits, diagnostic tests, and prescription medications. It also includes lost wages if you cannot work while healing from your injuries. If your injuries are permanent, you could also be eligible for compensation for loss of future earning capacity if you cannot return to your job or be gainfully employed.
  • Compensation for non-economic losses – This type of compensation is for intangible losses that are more difficult to quantify, such as injury-related physical pain, emotional distress, permanent scarring, disfigurement, loss of quality of life, and post-traumatic stress.
  • Punitive damages – The term punitive damages refers to a particular type of compensation that courts award when they determine at-fault parties behaved with extreme recklessness or intentional malice. The purpose of punitive damages is not to make victims whole but to punish wrongdoers and discourage similar behavior in the future.
  • Interest – Courts sometimes order at-fault parties to pay victims interest, which may go back to the date the lawsuit was filed.

 Federal and State Tax Law Governing Personal Injury Settlement

Internal Revenue Code (IRC) Section 61 contains federal rules and regulations regarding the taxability of personal injury settlements. Under this section, all income is presumed taxable unless another section clearly states that it is exempt. While most of the money from a personal injury settlement is legally considered income, the tax implications for each portion of a settlement vary depending on the answer to a simple question: “What is this portion of the settlement supposed to replace?”

IRC Section 104 provides certain exemptions for income derived from personal injury lawsuits and out-of-court settlements. Specifically, IRC Section 104(a)(2) allows you to exclude from your gross taxable income any compensation you receive in a personal injury settlement or court verdict for physical injuries or illnesses.

Georgia has its own state income tax laws, but they correspond to the federal standards regarding settlements and awards.

Now let’s explore how this law could apply to your injury case.

Compensation for Physical Injuries

Most of the compensation in many personal injury cases is for economic losses, such as medical expenses and other costs related to your physical injury. This type of compensation is meant to “make the person whole.” In other words, it is restoring an individual to the financial position they would have been in if their injuries had never occurred. Therefore, compensation for losses related to physical injuries could be considered a type of reimbursement for costs associated with your physical injury.

You don’t gain anything from this kind of compensation, so neither the federal government nor the state of Georgia will tax it. After all, paying taxes on this type of compensation would leave you in a worse financial position than before, defeating the purpose of receiving compensation.

Compensation for Non-Physical Injuries

Compensation for non-economic losses is not always taxable, but the origin of the loss is the critical factor in determining whether it is taxable. Compensation for non-economic losses, such as physical pain and suffering, is not taxable if the loss directly results from a bodily injury or illness. Most intangible losses in personal injury cases result from physical injury or illness and are not taxable.

However, compensation for intangible losses that do not originate from physical injuries or illnesses is not tax-exempt. That compensation is taxable if you receive compensation for a loss unrelated to any physical injury or illness.

Compensation for Lost Wages

Any compensation you receive in a personal injury settlement for lost wages is generally taxable. This is because compensation for lost wages replaces expected income that the IRS considers taxable. When you report this type of compensation, the IRS will tax that portion of your settlement at the same rate it uses for Social Security and Medicare taxes.

Punitive Damages and Interest

Punitive damages and interest payments only come from trial verdicts, not out-of-court settlements. Furthermore, these types of compensation go above and beyond the monetary amount you need to be made whole for your injuries. As a result, you must report compensation for punitive damages and interest to the IRS as “other income” and “interest income,” respectively, and pay the appropriate tax rates.

Does It Matter If the Case Was Settled Out of Court?

No, it does not matter for tax purposes whether you received a trial verdict or settled your personal injury case out of court. Under 26 Code of Federal Regulations (CFR) § 1.104-1(c), the laws regarding compensation for physical injuries or illnesses are identical, regardless of whether the money came from a lawsuit or settlement agreement.

Contact a Georgia Personal Injury Lawyer Today

If you were injured and have a personal injury claim, the compassionate team at Kevin A. Adamson, P.C. can help you pursue the compensation you deserve. We can determine the potential value of your claim and any taxes you might owe on a settlement or verdict. We can try to maximize your award and minimize the tax burden. Contact our Georgia personal injury lawyers today for a free consultation.