You’ve reached the conclusion of your personal injury lawsuit. Either by settlement or by trial, you’ve received significant monetary compensation. After the stress of your claim, you’re ready to be done and move on with your life. Attorney’s fees, court costs, and medical bills will need to be paid from your award. But what about the IRS? With tax season upon us, you may be wondering if the government also gets a cut of what you receive.
In most cases, your personal injury award will not be subject to federal taxes. The same general rule applies to Georgia state taxes. The tax treatment of your award will be the same, whether you reach it through settlement or trial. However, bear in mind that awards are complex. They are intended to compensate the plaintiff in several different ways. As a result, awards often contain both taxable and non-taxable elements. Let’s examine both.
The part of your settlement or award that compensates you for your physical injuries is generally not taxable. One of the most significant types of damages falling under this category is medical bills. Damages for pain, suffering, and emotional distress may also be excluded from taxes. However, to qualify, they must be directly related to your physical injuries. Settlements or awards may also cover property damage arising from your accident. The IRS and the State of Georgia view all of these as a form of reimbursement to the victim. As a result, in most cases, there isn’t a tax for them.
There are some important exceptions. One major one is lost wages. Had you worked (had the injury not happened) you would have earned this money and paid taxes on it. As a result, any portion of the award or settlement that covers lost wages will be taxed.
Another taxable event arises where plaintiffs deduct out-of-pocket medical costs on previous tax returns. If you wrote off these eligible expenses, any compensation you receive for them will likely be taxed.
Punitive damages, which are awarded in some cases to punish the responsible party, will likely be taxed. The IRS considers these awards to be in addition to actual costs suffered by the plaintiff. Certain non-economic damages not directly related to the injury, such as emotional distress, will also probably be taxed.
As mentioned above, many awards combine taxable and non-taxable components. You will need to understand which is which for tax purposes. Also, you may need to demonstrate which is which to the IRS. Failing to do so could subject your entire award to taxes. Be sure to speak with your local personal attorney about this so that your tax return is easier to handle.
These and other tax matters can quickly become overwhelming and add more stress to an already difficult situation. Fortunately, there are strategies to make the taxes surrounding your personal injury award easier to manage. One possible way to do this is by using what is called structured settlements. These settlements payout to the plaintiff over time and may help reduce tax bills. Another important way to address the tax implications is to separate the award into compensatory and punitive parts. This will make it easier to prove to the IRS which damages are taxable and which are not.
