If you’ve received a settlement after a car accident or other personal injury case, a common concern is whether any of that money will be subject to taxes. Understanding the tax implications of your settlement is key to ensuring you maximize the funds available for your recovery. At 770GOODLAW, Car Accident Lawyers, we want to provide Georgia residents with a clear guide to what may be taxed and what is generally excluded.

Non-Taxable Damages: Physical Injuries or Sickness

Generally, settlement funds awarded for physical injuries or sickness are not considered taxable income. The IRS typically excludes compensation meant to cover medical bills, pain and suffering, or emotional distress directly linked to physical injuries. So, if your settlement addresses physical injuries from a car accident, you won’t usually owe federal taxes on these portions of the award.

Taxable Portions: Emotional Distress and Mental Anguish Not Related to Physical Injury

If your settlement includes compensation for emotional distress or mental anguish that isn’t directly related to a physical injury, this portion may be subject to tax. For instance, if you’ve been awarded damages for trauma or emotional suffering without a physical injury, this portion could be treated as taxable income.

Lost Wages: Potentially Taxable Income

Lost wages can be another portion of your settlement that’s taxed. Since wages would have been taxable if you had been able to work, the IRS considers compensation for lost income to be taxable even if it’s paid as part of a settlement. This applies whether the injury caused you to miss work temporarily or if it affected your ability to work long-term.

Punitive Damages: Always Taxable

Punitive damages are awarded in some personal injury cases as a means of penalizing especially reckless or harmful behavior. These damages are not considered compensation for injury recovery, so they are usually always taxable. Even if awarded alongside non-taxable compensatory damages, punitive damages are treated as taxable income.

Interest on Settlement Payments: Taxable Income

Sometimes, a case takes an extended time to settle, and if any interest is included in the final payout, that interest will be considered taxable. Interest income is treated the same way as interest from a savings account or investments, regardless of its origin.

Tips for Managing Your Settlement Taxes

To help minimize the tax impact on your settlement, consider these steps:

  • Consult a Tax Professional: A tax advisor can clarify any obligations you may have based on your specific settlement terms.
  • Structure Your Settlement Wisely: Consulting with your attorney can help structure the settlement in a way that maximizes tax-free portions.
  • Save for Tax Payments: If any part of your settlement is taxable, it’s wise to set aside funds so you’re prepared when tax season arrives.

Questions? Contact 770GOODLAW for Guidance

At 770GOODLAW, Car Accident Lawyers, we’re here to support Georgia residents every step of the way. Our team works to ensure clients understand all aspects of their personal injury settlements, including the potential tax implications. If you have questions about your settlement or need assistance with a personal injury claim, reach out to us today.