Scholle Law sheds truth on the often misunderstood issue of tax liability on personal injury settlements in Georgia
The issue of taxation is complicated.
Whether you are talking about income tax, corporate taxes or the many other taxes that hard-working Americans pay, the topic of taxes is voluminous and ever-changing.
In this article, Atlanta accident and injury attorney Charles Scholle discusses the issue of whether or not Georgia personal injury settlements are taxable. By breaking down the different components of a personal injury settlement, we seek to provide a thorough evaluation of how each part relates to potential tax liability.
How Scholle Law can help
While the Scholle Law Firm has experienced personal injury attorneys, our law firm does not handle tax matters. Anyone needing assistance and a thorough review of their own tax situation should contact an experienced tax professional, which may include a tax attorney, CPA or other professional or firm that is experienced with tax matters.
However, we don’t have to be tax attorneys to tell you that there are several important factors to consider when discussing the issue of if and when a personal injury settlement can be taxed.
Our law office is in the business of getting injured people the full and fair compensation they are entitled to under the laws of the state of Georgia. Our clients are people who have been seriously injured (or the family members of individuals who were tragically killed) because of someone else’s negligence. In addition to physical and emotional harm, these people have suffered financially due to lost wages, medical bills, property damage and pain and suffering.
In some cases, we have clients who experience what is called a “loss of consortium.” In other cases, we take a case to court so that the client may eventually receive punitive damages, or they may later receive interest with their judgment.
Each one of these different components is a part of the compensation that our team works hard to secure for every client, and these components all have different definitions and reasons why they may or may not be subject to tax.
Tax liability varies by the type of compensation awarded
It is imperative for any attorney who handles serious injury cases to have an understanding of the matter of tax liability because it is a question that comes up with every case.
It should go without saying that injury victims are generally people who are in a tough situation due to being unable to work and having significant medical bills. We understand the needs and concerns of our clients, and we hope that writing on this topic will help resolve your concerns about your personal injury settlement being reduced because of taxes.
There are different components to a personal injury settlement, even though it may be paid by an insurance company in a lump sum. Each part has a significant policy reason behind its potential for tax liability.
The good news is that most of the components of settlements related to physical injuries or sickness are NOT subject to tax liability.
If you have a question about tax liability or your own tax situation, consult with an experienced tax professional. Accident victims with questions about this issue or anything else relating to their accident or injury should contact an experienced Georgia injury lawyer at Scholle Law as soon as possible.
Tax liability for money received in a personal injury settlement for lost wages can be difficult to figure out. The general rule is that if the lost wages are related to a physical injury or sickness, then the proceeds of compensation paid in your settlement for this component are NOT taxable by federal or state taxing authorities.
However, if you have a claim for lost wages due to emotional distress that you cannot link to a physical injury or sickness, then those lost wages may potentially be taxable.
One of the potential reasons behind the distinction is the difference in the claims themselves. Physical injuries and illnesses due to negligence are given more favorable protection from taxation, arguably due to the IRS’ distinction between the 2 types of injuries.
Many plaintiff’s lawyers will misleadingly give a blanket answer that says all lost wages in a personal injury action are tax exempt. This is not accurate.
For instance, if a plaintiff has 2 separate claims for lost wages due to both physical sickness or injury and emotional distress, then it is imperative for the attorney(s) for the plaintiff to be able to document what settlement money corresponds to what claim. Having that information will make it a lot easier for the client to provide the right information to the IRS or their accountant at tax time.
Thankfully, there is no tax liability for clients receiving personal injury settlements covering their medical bills that relate to injuries and sickness claimed in a personal injury action or traditional tort claim.
For example, if a client has extensive medical bills for broken bones and accompanying surgeries due to a car accident in Georgia, and the insurance company for the at-fault driver pays a portion of the settlement to go towards the client’s medical bills, then this part of the settlement should be shielded from any and all tax liability.
In some cases, a plaintiff may have an injury case where their sole argument for their injury relates to a claim for emotional distress. If that is the case, then the client will again be subject to potential tax liability, unless they can prove that the emotional distress somehow relates to a physical injury or sickness caused by the defendant tortfeasor.
From an attorney’s perspective, being able to protect your client’s settlement portion(s) related to physical injuries is very significant because often the client’s bills may be exorbitant. If those monies were taxable, then there would be very little opportunity to help clients recover to where they were prior to being injured—or “made whole again,” as we like to say.
Any knowledgeable personal injury law firm that handles Georgia car accidents will tell you that property damage claims from an accident case are typically resolved months before the personal injury claim from the car accident is settled.
The 2 resolutions that a plaintiff has regarding the damage to their motor vehicle are:
- A check from the insurance company for the vehicle’s repair costs, or
- A check to the vehicle’s owner for replacement value because the vehicle was deemed a total loss.
The good news is Georgia law recognizes that it would not be equitable to tax a person on monies received from an insurance company for the purpose of repairs or replacement in the event of a total loss. So, anyone in a car accident should know that there is nothing to worry about regarding potential tax liability for the monies received to pay for repairing or replacing their car, truck or another wrecked vehicle.
Pain and suffering
When was the last time you saw or heard an advertisement for a personal injury lawyer or law firm where the words “pain and suffering” were not in there somewhere?
When a lawyer negotiates a settlement for their client, the lawyer should always have a discussion with an insurance adjuster or insurance defense lawyer relating to the different components of a personal injury settlement, including pain and suffering. When a lawyer makes a case to the jury, again the lawyer should speak to them about pain and suffering when it’s time to discuss the issue of damages.
“Pain and suffering” can be subjective and, in some cases, difficult to quantify. For a client with hospitalization and multiple surgeries, you may be able to ask for a substantial amount of compensation for pain and suffering.
But it’s important to understand that usually the argument for pain and suffering will be linked to a physical injury or sickness caused by the insurance company’s insured (negligent defendant) who pays the settlement or verdict. These monies can be significant.
Thankfully, pain and suffering damages linked to physical injuries and sickness are exempt from taxation.
Loss of consortium
A claim for loss of consortium is generally made by the spouse of the injured or killed accident victim. In more serious accidents, the aftermath may leave the spouse suffering without the aspects of the relationship that they may have enjoyed prior to the accident. This could include situations when the injured spouse isn’t well enough to accompany them to social functions, or maybe the spouse is no longer able to provide assistance around the house. Loss of consortium claims can even include a loss of intimate activities that the spouse may no longer be able to participate in.
You might think that there could be an issue with the taxation on a loss of consortium claim because the claim belongs to the non-injured party. However, because most claims for loss of consortium relate to a physical injury or sickness, these claims are also generally protected from tax liability.
Non-injury related claims
For the most part, many of the various components of a personal injury settlement are shielded from being taxed. However, there are a few situations when such protections are not provided.
We have already discussed that cases not rooted in personal injury or sickness are likely to have taxes taken out on them. We gave examples of emotional distress claims that are not related to a physical injury or sickness, but it’s also important to understand that there are certain claims out there that are indeed taxable.
While our personal injury law firm mostly handles settlements that are not taxed, if you have a non-injury related case then you may not be so fortunate. For example, damages received in a settlement or verdict for breach of contract are usually subject to taxation.
There are important changes under Georgia code that now prevent personal injury plaintiffs from deducting (itemized miscellaneous tax deductions) their contingency-based attorney fees that are paid on punitive damages and/or interest awards.
It’s important to note that this does not apply to contingency-based attorney fees for plaintiffs in business or other non-personal injury related actions.
Punitive damages are damages awarded to a plaintiff for the purpose of punishing the defendant and deterring them from repeating their bad conduct in the future. Since new laws have been enacted in Georgia, the total dollars in punitive awards are now taxable.
Let’s look at an example:
Plaintiff John sues the defendant and the case goes to court. John has a 40 percent contingency fee agreement with his attorney. If the court should award John compensatory damages for things like medical bills and lost wages, then those monies are NOT taxable. However, if the jury awards punitive damages, the IRS will tax the punitive damages awarded to John.
In this example, John is awarded $100,000 in punitive damages and he pays his attorney $40,000 of that award per his contingency-based fee agreement. Under the new law, John would be taxed on the total $100,000 and not on just his “take-home” portion (after paying the attorney fees) of $60,00.
This rule still applies even if the defendant pays the attorney fee as a part of a settlement agreement. If John receives compensatory damages and punitive damages, then the IRS will still consider the gross amount of awarded punitive damages taxable, while the compensatory damages for physical injury or sickness will not be subject to taxation.
In some cases, a plaintiff may be awarded interest payments. Interest is treated the same way as punitive damages. The full amount of awarded interest is considered taxable. Even if an attorney fee is paid on the award, the gross total interest award is the amount that is taxable by the IRS. And again, attorney fees paid on interest payment awards are not able to be itemized and deducted.
Consult Georgia injury lawyer Charles Scholle for answers and advice
Many times, we see misinformation relating to this important topic of taxation and personal injury settlements. We often see the incorrect blanket statement that personal injury settlements are not taxable. In light of the recent changes regarding punitive damages, interest awards and deducting attorney fees, it is especially important to correct this misinformation.
While the main components of lost wages, medical bills, property damage and pain and suffering in negligence cases related to physical injuries and sickness are not taxable, there are situations where personal injury settlements and verdicts can be taxed.
Again, damages relating to non-injury cases (breach of contract, business torts, etc.), claims for emotional distress without proving causation from physical illness or injury, punitive damages and interest awards may all be subject to taxation.
It is your lawyers’ job to get you the most accurate information and advice as it relates to your legal matter. If you are unclear about an issue like this or any other issue relating to your case, speak to a knowledgeable and experienced lawyer as soon as possible.
If you or a loved one were injured in a car, truck or motorcycle accident in Georgia, you will most likely have an uphill battle in dealing with the other party, parties or their insurance company(s). At Scholle Law, our attorneys fully understand Georgia law when it comes to being involved in an injury accident. We know that you have questions and we understand that there will be issues that require careful explanation.
We are here to answer your questions and make sure that you have all the information you need as you move forward with your accident case.