In the months after an injury when the bills are piling up, the idea of a personal injury settlement to pay for your losses can sound too good to be true. As a result, many injury victims wonder whether they will really get the full amount of their settlement—or if it will be whittled down by taxes.
The good news is that no, in most cases, personal injury settlements in Georgia are not subject to tax. And, in the rare cases that are exceptions, you may only owe taxes only on part of your settlement, not the whole thing.
The reason for this is simple: the entire idea behind the income tax system is that you pay tax on gains. But a personal injury settlement is not a gain at all; it’s simply compensation for a loss. In other words, when the entire court case is said and done and you’ve gotten your full settlement, legally you aren’t considered ahead at all (even if, financially, you are). You’ve simply had your losses made up to you.
What kinds of personal injury settlements are completely tax free?
Generally speaking, your settlement will be tax-free if it is:
- Compensation for physical injuries or physical sickness, defined as “observable, bodily harm”
- Resulting from a traditional tort, meaning a settlement related to a car accident, slip and fall accident, or other unexpected injury
Dog bite claims, defective medical device injuries, and whiplash claims are all examples of the types of cases where your settlement is normally tax-free.
What are the exceptions where I may have to pay taxes?
The key to the tax-free situations above is the language about a “physical” injury. Physical injuries can be very broadly defined: internal damage, sickness, infection and follow-up surgeries are all examples of physical harm. But this does not extend to injuries that are purely emotional or psychological in nature. If your emotional trauma is related to a physical injury, it’s still tax-free. But if there is no corresponding physical injury, you will owe tax on the amount.
There are two other less common situations where your settlement may be taxed:
- Employment-based claims (such as illegal discrimination) where the settlement is for lost wages or back wages. This doesn’t typically apply to injury claims.
- Physical injuries where you already deducted the cost of the injury in a previous tax year. This usually only applies in lawsuits that take place months or years after the initial care happened. If you already wrote the cost of care off as a loss in a previous year, then the compensation you receive will be taxed as a gain.
It’s possible that these situations will only apply to part of your settlement—for example, if you already deducted emergency room costs last year but haven’t yet deducted surgery costs from this year.
Have you been injured? John Foy & Associates offers a free consultation with some of the most experienced and respected personal injury lawyers in Georgia. Fill out the form to your right or call us at 404-620-6012 to get your FREE consultation today.