Depending on what the settlement covers, you may need to pay taxes on settlements you received from an insurance company or defendant after a personal injury accident in Atlanta, Georgia. The IRS taxes awards that are defined as 1099 income, while not taxing ones that cover debt obligations.
In general, compensatory damage awards are not taxable. This includes:
- Physical suffering awards
- Property damage awards
- Medical expense awards
The logic behind this is that awards to cover things like medical expenses and physical losses, whether for health or property, are not gains. They only exist to cover new relevant expenses or debts you would not have incurred had the accident not occurred, such as medical bills or replacing your damaged vehicle. For this reason, it’s not considered taxable income.
Damages that have the potential to be seen as income (e.g., there is a potential financial gain on top of paying off your medical or repair bills) are taxable. These include:
- Punitive damages
- Lost wages or lost profits
- Interest gained from delayed settlement awards
Whether or not your settlement award is taxable or tax-exempt, you are still required to report the income to the IRS.
Which Personal Injury Settlement Damages Are Taxable?
If your settlement qualifies as 1099 income, you will be required to pay a tax on it. This is a form of non-employment income, which the IRS has a right to tax.
- Punitive damages: Punitive damages are additional awards that are meant to punish the at-fault party for their actions and discourage the behavior in the future. Compensation is therefore greater than the actual cost for full recovery, so the IRS defines this excess as taxable income.
- Lost wages or lost profits: If you win a lawsuit or negotiate a settlement and receive wage compensation, you owe the IRS taxes as if it were earned as regular income.
- Interest on settlement awards: If there is a delay in receiving your settlement, the unpaid portion may accrue interest. Because the interest is an additional payment on top of the award amount to make you whole, you would owe taxes to the IRS on the gain.
Which Damages Are Considered Non-Taxable?
Compensatory damages or damages that are helping you recover from debt are generally non-taxable in Atlanta.
- Physical suffering: Physical suffering falls under the pain and suffering compensation umbrella. For them to be non-taxable they need to correlate to a physical injury or illness.
- Property damage awards: Property damage awards are not taxable unless the award exceeds the base amount that you will need to replace or repair your property.
- Medical expense awards: Compensation that goes toward covering the cost of medical expenses or medical debt from accident-related care is not taxable unless you claimed a tax deduction for those expenses in a previous year.
Claiming a tax benefit to cover immediate medical expenses while you wait for settlement is a common way to mediate upfront costs, but you should be aware that you cannot claim a double exemption. If you received a tax benefit, you will need to pay taxes on the settlement once you receive it.
Special Circumstances That May Affect Tax Liability
You may receive a pain and suffering award for emotional distress. While pain and suffering damages can be non-taxable, emotional distress awards are an exemption. If there is no physical injury connected to the emotional distress of the event, then the award received to cover these damages will still be taxable.
Emotional pain is difficult to quantify for compensation purposes. There’s no bill or debt tied to this compensation. While the damages you receive can go towards your recovery from emotional pain, there is no perfect way to tell how much that will cost.
Can I Avoid Paying Taxes on My Personal Injury Settlement?
Depending on the reason you receive the award, you may or may not be able to avoid paying taxes on your personal injury settlement. However, there may potentially be ways to reduce how much you pay. You should speak with an accountant or tax preparer to learn about your options.
Our Atlanta Personal Injury Lawyers Will Fight for the Compensation You Deserve
Our Atlanta personal injury attorneys at the Dressie Law Firm will fight to maximize your recovery. Our goal is always to ensure our clients are made financially whole after an injury has left them with debts, unexpected medical expenses and pain and suffering.
Connect us online or call us at (678) 726-1429 for a free case evaluation.