It all depends on what you actually get in your settlement whether you will end up paying taxes on it or not.
What you owe in taxes for an insurance settlement following a car accident in Atlanta depends on the type of damages you received. Some aspects, like pain and suffering, will not be subject to tax, while others, like lost wages, will face traditional state and federal taxes.
Many individuals will never pay any taxes for their personal injury settlements. However, the steps you take during the process of negotiating your settlement could impact your future tax obligations. For more personalized information concerning your tax obligations, you might want to consult a lawyer from our team.
Understanding Types of Damages
The point of any settlement is to provide monetary compensation to make up for the financial, emotional, and physical hardship you have experienced. The law can provide an avenue so that the responsible party must pay for them.
These damages might involve:
- Medical expenses
- Lost wages
- Pain and suffering
- Property damage
- Emotional distress
These categories cover the aspects of your life touched by the accident—your health, income, pain, and state of mind.
What the Law Says About Taxing Settlements
According to the Legal Information Institute (LII), “any damages received on account of personal physical injuries or physical illness” are excluded from taxes. Although that seems simple enough, the law then goes on to list exceptions to that exclusion.
Nonetheless, this statute does provide a baseline for determining what you may owe. As such, any damages that are directly related to injuries or illnesses resulting from the accident could be exempt from taxes.
For a free legal consultation, call 404-214-2001
Damages That Are Generally Not Taxable
Any type of compensation that directly stems from your injuries will not generate a tax debt. The categories of compensation typically not subject to tax are:
- Medical expenses
- Pain and suffering
- Property damage
The statute from the federal tax code is most specific about these types of damages. They are part of a process to right a wrong and are often meant to reimburse you for bills you already paid. As a result, they are not income, but they help you return to a new normal.
The reason that compensable damages are not taxable is straightforward. These damages are not designed to reward you, they are intended to make you financially whole after a loss. If the government takes a portion of your compensation, you are left paying for some of your losses out of pocket—even when you were not at fault. It is only fair that the government does not tax compensatory damages in a personal injury lawsuit.
Medical Expenses
Medical expenses make up a large portion of most personal injury settlements. Damages for the cost of your care are never taxable. Since this category deals with costs associated with physical injury, tax exemption could extend to money you received for:
- Bill reimbursement
- Ongoing prescriptions
- Current care
- Follow-ups
- Future complications
However, according to the Internal Revenue Services (IRS), you may have to pay taxes on this aspect of your settlement if you deducted some of your medical expenses in the previous year. Remember, settlement negotiations can go on for years and you will need to keep track of deductions you’ve made previously.
There are also damages that are indirectly related to your injuries that are not taxable. One of the common examples is the cost of domestic services. If you are unable to perform daily household tasks or care for yourself because of your injuries, you might be entitled to compensation for the cost of in-home care. Compensation for domestic care is not taxable.
Pain and Suffering
Pain and suffering is a form of non-economic compensation—it doesn’t directly correlate to a bill or expense. As long as these damages relate to your injury, they can be exempt from taxes. As the IRS puts it, the pain and suffering you experienced must originate from the injury.
For example, being left permanently disabled is traumatic, potentially affecting your career, your relationships, and even your independence. Since pain and suffering compensation is to make up for emotional and psychological injuries, the damages are not taxable.
Loss of Consortium
A loss of consortium claim is typically made by the spouse of an individual who is killed or injured in an accident. These claims cover the loss of aspects of a relationship that the couple enjoyed prior to the accident. Loss of consortium claims could apply when an injury victim is unable to accompany a spouse to social gatherings. These claims even cover the loss of an intimate relationship due to the severity of the injuries.
Compensation for the loss of consortium is subjective, but that does not make it taxable. These losses are directly related to the injury and would not have occurred but for the defendant’s negligence. Since they are tied directly to bodily harm, compensation for the loss of consortium is not taxable.
Property Damage
Property damage settlements are often handled separately from the medical bills portion of a personal injury case. It is not uncommon for the insurance company to make a settlement offer for a property damage claim even though aspects of the personal injury lawsuit are disputed. These claims are generally resolved in one of two ways:
- Your vehicle is repaired, and the insurance covers the cost
- Your vehicle is totaled, and the insurance company sends you a check for its full value
In either situation, your best-case scenario is returning to the position you were in before. Either your vehicle is repaired, or you have the assets to replace your totaled vehicle with something similar.
If compensation for your property damage was taxable, you would be stuck paying for some of those losses yourself. Because that is not equitable, the government does not consider compensation for property damage as taxable income.
Damages Potentially Subject to Tax
Taxes apply to settlement money that is not directly tied to the injury, as well as any literal income you receive to make up for time off work. As a result, you may want to ask a lawyer on our team about taxes regarding:
- Lost wages
- Any interest
- Emotional distress
Lost Wages and Interest
To determine your possible damages in this category, we imagine what would have happened if you were never injured in the accident. We use that to arrive at a compensation amount that can cover what you would have earned in income. Those damages for lost wages are treated like the wages themselves. And, if you had been at work, you would have paid taxes on that income. Taxes on this category are therefore necessary.
In that case, the settlement from your Atlanta car accident could be subject to:
- Georgia income tax
- Federal income tax
- Social security
- Medicare
If you receive your settlement all at once, the taxes could seem high and even push you into a higher tax bracket. Talking to one of our car accident attorneys can help you learn ways you can minimize your tax obligations. We can discuss whether you have options regarding when and how you are paid.
Emotional Distress
Like pain and suffering, emotional distress can be free of tax obligations, but only when it is directly related to your injury. In some cases, tying emotional distress directly to your injury can be challenging, and these damages can be subject to tax as a result.
Because this area of law can be confusing, you might want to consider consulting our team to determine whether your emotional distress damages require paying taxes.
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Know What to Expect With Your Settlement by Calling Kaine Law Now
When negotiating and reviewing your settlement offers, the car accident team at Kaine Law will make sure you are informed of what happens after the claim is closed.
To learn more about which damages in your car accident insurance settlement in Atlanta will be taxed, call our office for more information today. The first consultation is free.
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