In Georgia, you may pay federal and state tax on some parts of a personal injury settlement or judgment, but not others. For example, you usually will not pay tax on money you receive for your physical injuries. However, the part of your settlement that covers lost wages will be taxed.
Let’s start with the two ways you can recover money for your claim:
- A settlement, which means you worked things out with the insurance company and received a payment (without a court decision). Or,
- A judgment, which means you went all the way to a court trial and the judge awarded you money.
Whether you got a settlement or a judgement, the way it’s taxed will depend mostly on the types of losses it covers. However, your taxes may also be affected by the way your settlement is paid. A car accident lawyer can help you understand and minimize your taxes.
If I recover money to pay for medical care for my injuries, will I pay tax?
Usually, no. The costs of treatment for your physical injuries are usually not taxed. However, if you already deducted your medical expenses on a previous year’s tax return, you will have to report that portion of the settlement as income on this year’s return. In other words, you can’t get a tax benefit twice.
If I received money for emotional injuries or pain and suffering, will it be taxed?
It depends. If your emotional distress or “pain and suffering” were a result of your physical injuries, then the money you receive will not be taxed. However, if you recover money for other types of emotional distress, that money will be taxed.
What about lost wages?
If the accident hadn’t happened, you would have continued working and would have paid tax on your earnings. Since lost wages are designed to replace your pay, you will pay tax on them, including Social Security and Medicare taxes. However, the tax amount should not be more than you would have paid anyway if you had simply worked during that period.
Are there other things that are taxable?
Yes, punitive damages are considered taxable income. Punitive damages are awarded when the other driver in your accident committed a serious crime, and you were the victim of that crime. For example, if they were driving under the influence of drugs or alcohol, and that’s what caused the accident, the court will likely order them to pay punitive damages. Since the punitive damages are extra money above and beyond your actual costs, it will be taxed—it is a gain.
Also, if you received interest as part of your settlement, the interest is also taxable. Interest is uncommon in car accident claims unless they last for quite some time. For example, if it takes a year or two to conclude the case (which is rare), and you went all that time without the money you were owed, you’ll likely get some interest on it. The interest is always taxable, even if the rest of the money is not.
Will I pay Georgia taxes?
Georgia taxes are based on your adjusted gross income reported on your federal tax return. Thus, if your settlement or judgment is taxed by the federal government, it will also be taxed by the State of Georgia.
How can I minimize the taxes I will pay?
If you are receiving a large settlement or a judgment from car accident law suits in Atlanta, it may include lost wages extending into the future. Your tax bill may be lower if the money is paid out over time, in what is known as a “structured settlement.” Depending on your situation, there may be other ways to minimize your tax burden.
A car accident lawyer can negotiate with the insurance company to get you the best settlement possible – and can work to get it paid in a way that will minimize your tax consequences.
Talk to an Atlanta Car Accident Lawyer for Free
Our lawyers have been negotiating settlements and winning judgments for car accident victims for decades. We understand the tax issues, and we won’t charge you unless we win you money. Let us consult with you for FREE. Call us at (404) 341-6555 or fill out the form to the right to get your free consultation today.