Do You Have to Pay Taxes on Settlements You Receive After Personal Injury Accidents in Atlanta, GA?

Mar 24, 2023

Understanding Personal Injury Settlements in Georgia

 

Before diving into the tax aspect, it is important to understand what a personal injury settlement is and how it works in the state of Georgia.

A personal injury settlement is a legal agreement between an injured person (plaintiff) and the party responsible for their injuries (defendant). In most cases, this involves the injured party receiving financial compensation for their physical injuries, emotional distress, lost wages, and other damages resulting from the accident.

In Georgia, personal injury settlements are usually reached through negotiations between both parties or through mediation rather than going to trial. This allows for a quicker resolution and avoids the uncertainty and expenses associated with a trial.

 

Are Personal Injury Settlements Taxable in Georgia?

 

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 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, they are 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. If you receive a Form 1099-MISC for your settlement, make sure to include it on your tax return.

If you are unsure about the taxable status of your settlement award, it’s advisable to consult with a personal injury lawyer. They can help guide you through the process, ensure that you report any necessary income accurately, and avoid any potential issues with the IRS.

 

Which Personal Injury Settlement Damages Are Taxable?

 

If your Georgia personal injury 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 meant to punish the at-fault party for their actions and discourage future behavior. 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 you are delayed 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 it to be non-taxable, it needs to correlate to a physical sickness or injury.
  • 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 covers 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 no physical injury connected to the emotional distress of the event occurs, 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 help you recover 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 be ways to reduce the amount you pay. You should speak with an accountant or tax preparer to learn about your options.

 

Our Atlanta Personal Injury Law Firm Will Fight for the Compensation You Deserve

 

Our Atlanta personal injury lawyers 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.

We understand the complicated tax implications of personal injury settlements and will work tirelessly to help you receive the most favorable outcome.

If you or a loved one has been injured in an accident and are considering filing a personal injury claim, our experienced attorneys offer a free consultation to discuss your case. We can help you determine if your settlement may be taxable and advise on the most efficient way to report it to the IRS.

Connect us online or call us at (678) 726-1429 for a free case evaluation.