Will I Be Taxed on My Personal Injury Settlement?
Paying taxes is a civic responsibility of every individual that lives and earns in the United States. Whether you receive a raise at work, make more money from your business, win a lottery, or inherit an asset from a deceased loved one's estate, you're required to fulfill your tax obligations.
However, what happens when you recover damages from a personal injury claim or lawsuit? Are you required to pay taxes on your financial compensation? The short answer is "no," but there are certain exceptions where you may be required to pay taxes on personal injury settlements.
Attorney Walter Gabriel is committed to offering knowledgeable and dedicated advocacy to clients in personal injury and tax-related matters. As a seasoned Georgia personal injury attorney, he can work to understand your unique situation and enlighten you about the state's taxation laws for personal injury settlements. The firm proudly serves clients across Atlanta, Dunwoody, and Alexandria, Georgia.
IRS and State Taxes After Receiving Compensation
A personal injury settlement is an amount received by a claimant as financial compensation for their injuries and damages suffered in a negligent accident. According to statistics from the National Safety Council, the average cost of motor-vehicle accident injuries is between $29,200 and $101,000.
Furthermore, damages that may be recovered through a personal injury claim or lawsuit are categorized into the following:
Economic Damages: These are actual damages resulting from physical or non-physical injuries. Examples include medical expenses, lost wages, loss of earning capacity, and other out-of-pocket expenses.
Non-Economic Damages: These are damages for subjective, non-monetary losses such as emotional distress, pain and suffering, mental anguish, and loss of enjoyment of life.
Punitive Damages: This is often awarded to punish, penalize, or deter a defendant for their wanton, willful, and reckless actions or misconduct.
Generally, under federal and state tax laws, any income a person makes will be subject to taxes. However, the Internal Revenue Service (IRS) and Georgia state laws do not consider economic and non-economic damages as income. Hence, such personal injury settlements won't be taxed.
According to IRS Revised Code Section 85-97: "The entire amount received by an individual in settlement of a suit for personal injuries sustained in an accident, including the portion of the amount allocable to the claim for lost wages, is excludable from the individual's gross income."
Essentially, the IRS presumes that any financial compensation received by the injured person will help cover the injuries and damages suffered. Hence, they're not considered as taxable income or gain. However, there are certain exceptions.
Exceptions to the Non-Taxation Rule
As mentioned earlier, a personal injury victim may be entitled to pursue economic damages, non-economic damages, and punitive damages, depending on the magnitude of their injuries and other surrounding circumstances. The only exception to the non-taxation rule is that any monetary compensation received for punitive damages will be subject to taxes.
In Georgia, punitive damages may be awarded in a personal injury action where there is established clear and convincing evidence that the defendant's actions showed willful misconduct, wantonness, fraud, malice, and oppression. In addition, the law states that punitive damages may be awarded solely to penalize, punish, or deter the at-fault party and not as compensation to a claimant. Hence, punitive damages and interest accrued on it could be taxable.
Taxable Personal Injury Damages
In addition to punitive damages, interest on a judgment is taxable. Claimants often receive their financial compensation early upon settling claims with the insurer or reaching a settlement agreement. Conversely, it may take time to receive a judgment award after trial. Hence, the judge will include an interest provision in the monetary award until it is paid fully.
Exempt Personal Injury Damages
Non-taxable personal injury damages include economic damages such as medical costs, lost income and benefits, and loss of earning capacity. Also, non-economic damages – such as compensation for emotional distress, pain and suffering, and mental anguish – that are related to your physical injuries are non-taxable.
Reliable Legal Assistance
When you receive a financial settlement for an injury or damage, consulting with an experienced attorney is crucial to understand the taxation rules addressing your personal injury settlement. Attorney Walter Gabriel has the diligence and experience to advise and guide clients in complex tax matters involving injury settlements.
As your legal counsel, he can help file your claims, handle all negotiations and discussions with the insurance company, and help you achieve the maximum possible damages. In addition, Attorney Walter Gabriel will determine whether your financial compensation is taxable or non-taxable and help you make informed decisions at every step of the way.
If you or someone you know has been injured in a negligent accident, contact The Law Firm of Walter Gabriel, LLC, today to schedule a simple case assessment. Attorney Walter Gabriel can offer you the personalized legal guidance and vigorous representation you need in your claims. The firm proudly serves accident victims across Atlanta, Dunwoody, and Alexandria, Georgia.