If you have been injured and receive a personal injury settlement, you may wonder if you will be taxed on these settlements. In Georgia, the tax implications can vary significantly based on the specifics of the settlement. Different types of personal injury settlements might have different taxable incomes. 

Types of Personal Injury Settlements

Personal injury settlements typically compensate for losses incurred due to physical injuries or emotional distress caused by someone else’s negligence or intentional action. These settlements may include:

1. Compensatory Damages: Under this category of damages, you might have medical expenses, which would cover current and future medical treatments; lost wages, which compensate for the time the injured party was unable to work; pain and suffering damages, which pay for physical pain and emotional distress; and loss of consortium, which provides compensation for the impact on the relationship between spouses.
2. Punitive Damages: These damages are less common and are separate from compensatory damages. They are intended to punish the wrongdoer and deter similar actions in the future.

Taxability of Personal Injury Settlements

These settlements’ taxability under federal and Georgia state tax laws generally follows similar principles.
In Georgia, the taxability of personal injury settlements, particularly for lost wages, depends mainly on the nature of the damages awarded and the specific details of your case, as stated earlier. Generally, the IRS provides guidance on how different types of settlements are treated for tax purposes:

1. Physical Injury or Sickness: If your personal injury settlement arises from a physical injury or sickness, the IRS generally does not tax the settlement. This includes the compensation for the actual injuries or illness; often, lost wages associated with those physical injuries or illnesses are also non-taxable.
2. Emotional Distress or Mental Anguish: A settlement for emotional distress or mental anguish that does not stem from a physical injury or sickness is taxable. It is generally not taxable if it stems from a physical injury.
3. Punitive Damages: Any punitive damages included in the personal injury settlement are generally taxable, regardless of the nature of the lawsuit.
4. Interest: Any interest on the settlement is taxable. Sometimes, settlements are paid out over time, and interest may accrue on the unpaid balance. This interest portion would be subject to taxation.

For lost wages, particularly:

• Lost Wages from Physical Injury: If your lost wages are compensation for a physical injury or sickness, they are generally not subject to tax.
• Lost Wages from Non-Physical Injury Claims: It is typically taxable if the lost wages compensation is not directly tied to a physical injury or sickness (for example, employment discrimination or wrongful termination).

Practical Considerations Involved In Taxability Of Personal Injury Settlements 

The payer of the personal injury settlement may issue a Form 1099 to the recipient, which must be reported on the tax return. The individual who has received the settlement should maintain thorough records of how the settlement amounts are allocated and any related expenses.

Takeaway

Personal injury settlements can be treated differently for tax purposes depending on whether the amount received was compensatory or punitive and whether the compensation is due to a physical or a non-physical injury. It is advisable to consult with a tax professional or attorney who can provide advice tailored to the specifics of your case, especially since tax regulations can change and interpretations can vary depending on detailed circumstances. Gautreaux Law, LLC, can help you obtain the personal injury settlement you deserve and will help you navigate the potential tax implications effectively. Contact our office for an initial consultation.