Is my personal injury settlement taxable?
Which part of my settlement is not taxable?
The portion of your settlement that the court awarded for your physical injuries or physical sickness is usually not taxable.
This changes, however, if you deducted the cost of your medical treatments on a prior year’s tax return. If that deduction gave you a tax benefit, you will have to report that amount as taxable income.
Are my lost wages taxable?
Any payment the court awarded for your lost wages is taxable income to the IRS. This is because this portion of your settlement is replacing wages that would have been taxable. The IRS will use the same Social Security and Medicare tax rates for the year you received your settlement to determine your tax obligation.
What about the amount I received for emotional distress or mental anguish?
The IRS will not tax settlement proceeds for emotional distress or mental anguish, as long as that distress occurred due to a physical injury or sickness.
If this was not true in your case, this part of your settlement is taxable. However, you can reduce the amount you need to report by doing the following:
- Deduct any medical expenses you paid as treatment for your emotional distress; and
- If you deducted these costs on a prior year’s tax return but did not receive a tax benefit, deduct them from your total amount.
I got punitive damages in my personal injury settlement. Are they taxable?
Yes, punitive damages are taxable even if they were directly for personal physical injuries or physical sickness. You will report them as "Other Income" on line 21 of your federal Form 1040.
Is the interest on my personal injury settlement taxable?
The general rule is that interest on any type of settlement is taxable. You will report it as "interest income" on line 8a of your Form 1040.
Do I have to pay Georgia state income taxes on my settlement?
If a portion of your settlement was taxable on your federal return, it is also taxable on your Georgia state return. This is because Georgia uses your Federal adjusted gross income from your federal return on your state income tax return. Whatever is not taxable on your federal return is not taxable on your Georgia state taxes.
Our attorneys can help you understand your settlement.
The personal injury attorneys at Law Office of Jason R. Schultz, PC, will help you navigate your claim and settlement. Call us today at 404-474-0804 to set up your free, no-obligation consultation.