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How Personal Injury Settlements Are Taxed

Posted in Personal Injury on April 28, 2022

If you or somebody you care about has been injured due to the actions of another individual or entity, there is a good chance you will be able to recover compensation for your losses. However, you need to know whether or not the compensation you receive will be taxed. Taxes seem inescapable in society, but the reality is that you may be in luck when it comes to a personal injury settlement and taxation.

Most Parts of a Personal Injury Settlement Are Not Taxable

Individuals who sustain injuries caused by the actions of another person or entity will likely be able to recover a wide range of compensation for their losses, but only if their claim is successful.

The vast majority of personal injury claims in Georgia are resolved through settlements with insurance carriers. However, if the insurance carrier does not offer a fair settlement, it may be necessary for an injury victim to file a lawsuit against the alleged negligent party. Sometimes, individuals receive personal injury settlements as a result of jury verdicts.

Some of the largest portions of personal injury settlements include compensation for medical bills, property damage expenses, and pain and suffering losses. Any settlement paid out for these types of damages will not be taxed by the IRS or the Georgia state government. The idea behind not taxing these types of compensable damages is that an individual would not have even had these expenses if not for the careless or negligent actions of another.

Lost Wages and Taxes

Not all portions of a personal injury settlement are tax-free, however. If a person is injured seriously enough and is unable to work, they will likely be able to recover compensation for their lost wages. If a person does receive compensation out of a settlement for their lost income, this portion of the settlement will be taxed at the person’s regular tax rate.

Why would wages be taxed out of a personal injury settlement?

The reality is that an individual would have been able to earn this income had they not sustained the injury. This is money that would have come in regardless, so it will be taxed as regular income.

Punitive Damage Taxation

In rare situations, there may be punitive damages awarded in a personal injury case. Punitive damages are typically only awarded in situations where the conduct of the defendant was found to be grossly negligent or intentional. The goal of punitive damages is to act as a punishment to the defendant as well as a deterrent to any other individuals or entities that they should not perform the same types of actions in the future.

If punitive damages are awarded, these are made on top of any compensable damage awards already agreed to. Punitive damages will be taxed by the IRS and state government.

Work With an Attorney

If you or somebody you care about has sustained an injury caused by the negligence of another individual or entity in Georgia, you need to reach out to an attorney right now. A skilled Atlanta personal injury lawyer will walk you through every aspect of these claims, and they will make sure that you understand what you may be entitled to for your losses.