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Do I Pay Taxes Out Of My Personal Injury Settlement?

If you receive compensation for a personal injury, whether through an insurance settlement or a jury verdict, you need to know whether or not any of that money is taxed. It seems like taxes are a part of just about every aspect of our lives. However, you may be surprised to find out that most of a personal injury settlement is exempt from state and federal taxes, with some exceptions. Here, we want to discuss your personal injury settlement and your possible tax obligation.

Paying State or Federal Taxes?

Neither the federal Internal Revenue Service nor the Georgia Department of Revenue requires that individuals pay taxes on a majority of their personal injury settlement. We want to make it very clear that you will not owe taxes on the following types of compensation you receive:

  • Coverage of any medical bills
  • Compensation for physical or emotional pain and suffering
  • Compensation for loss of consortium for a spouse
  • Coverage of attorney fees
  • Compensation for lost wages

You will notice that we also mentioned you would not be taxed on personal injury settlements that cover your lost wages. 

But aren’t you usually taxed on your wages?

While it is true that you do have to pay taxes on the income you earn at a job, any lost wage replacement compensation that you receive connected to your personal injury settlement will not be taxed at the state or federal level. They do not have to be claimed as income.

What About Punitive Damages?

One of the main exceptions to taxation on personal injury settlements revolves around punitive, or exemplary, damages. These types of losses are not awarded in all types of injury cases. Punitive damages are reserved for situations where the conduct of the defendant was deemed especially egregious or intentional. These damages are meant to punish the defendant and send the signal to others that this type of behavior is not acceptable.

Because punitive damages are not considered compensatory as far as a personal injury settlement is concerned, individuals who receive punitive damages do have to claim them on taxes

Interest on the Judgment

Another portion of a personal injury settlement that may be taxed occurs when interest accrues on the judgment. In most situations, interest will be added to the verdict if there is a length of time while the case is pending. 

For example, let us suppose you filed your lawsuit on January 1, 2020, but the claim did not resolve until January 1, 2022. 

Typically, you would receive interest on the verdict you receive starting on January 1, 2019, which continues to run until you receive the payment. Sometimes, payment does not happen right away, so if you received your payment on July 1, 2022, this means your settlement accrued approximately 2 1/2 years of interest. This interest will be taxable at both the state and federal levels.

We strongly encourage you to work with a skilled attorney who can examine your settlement and help you understand what is taxable and what is not.