(Injury Settlement) If you’ve received a settlement following a car accident or any personal injury case, one of the most common concerns is whether any of that money will be subject to taxes. Understanding the tax implications of your settlement is crucial to ensuring you make the most of the funds awarded to you for your recovery. At 770GOODLAW, Car Accident Lawyers, we want to provide Georgia residents with a clear guide to what portions of your settlement may be taxable and which are generally excluded, so you can avoid surprises when it comes time to file taxes.

Injury Settlement Non-Taxable Damages: Physical Injuries or Sickness

In most cases, settlement funds that are awarded for physical injuries or sickness are not considered taxable income. The IRS typically excludes compensation that is meant to cover medical bills, pain and suffering, or emotional distress that is directly linked to physical injuries. So, if your settlement addresses physical injuries from a car accident, such as medical treatment costs or compensation for pain and suffering, you generally won’t owe federal taxes on these portions of your settlement.

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

However, if your settlement includes compensation for emotional distress or mental anguish that is not directly related to a physical injury, these portions may be subject to tax. For example, if you’ve been awarded damages for emotional trauma, anxiety, or other psychological suffering that is unrelated to any physical injury, that part of your settlement could be considered taxable income by the IRS.

Lost Wages: Potentially Taxable Income

Another potential taxable portion of your settlement is compensation for lost wages. The IRS treats lost wages as taxable income because, had you been able to work, your wages would have been subject to taxes. Whether the injury caused you to miss work temporarily or if it impacted your long-term ability to earn, any compensation for lost income is typically taxable, even if it is part of your overall settlement.

Punitive Damages: Always Taxable

In some personal injury cases, punitive damages are awarded as a way to penalize especially reckless or harmful behavior by the defendant. These damages are not intended as compensation for injury recovery, and therefore, they are usually always taxable. Even if they are awarded alongside non-taxable compensatory damages, the IRS treats punitive damages as taxable income.

Interest on Settlement Payments: Taxable Income

If your settlement takes longer to resolve and you receive any interest on the final payout, that interest will also be considered taxable income. Similar to interest earned on savings accounts or investments, the IRS treats interest on settlement payments in the same way and requires it to be included in your taxable income.

Tips for Managing Your Settlement Taxes

To help minimize the tax impact on your settlement, here are a few tips:

Consult a Tax Professional: A tax advisor can provide you with clarity on any tax obligations you may have based on the specifics of your settlement. Every case is unique, and a professional can guide you through your situation.
Structure Your Settlement Wisely: Working with your attorney to structure the settlement in a way that maximizes the tax-free portions of your award can make a significant difference. Your lawyer can help ensure that your settlement is set up to minimize the tax burden.
Save for Tax Payments: If any part of your settlement is taxable, it’s important to set aside funds so you’re prepared when tax season arrives. Having a reserve for tax payments will prevent any financial surprises down the line.

Questions? Contact 770GOODLAW for Guidance

At 770GOODLAW, Car Accident Lawyers, we’re dedicated to supporting Georgia residents through every step of their personal injury claim. Our team works tirelessly to ensure that our clients understand all aspects of their settlement, including the potential tax implications. If you have any questions about your settlement or need assistance navigating your personal injury claim, we’re here to help. Reach out to us today for more information.