Personal injury settlement taxes are the federal and state income taxes that may apply to money you receive for an injury claim. For most injury victims, the good news is simple. Money received because of a physical injury is generally not taxable income. Some parts of a settlement can be taxed, though, and how the agreement is written matters.
Are Personal Injury Settlements Taxable?
Usually not. Under Section 104(a)(2) of the Internal Revenue Code, damages received “on account of personal physical injuries or physical sickness” are excluded from income. The IRS says this applies whether you settle out of court or win at trial. It also applies to lump sums and structured payments.
This exclusion covers most of what a car crash, fall or dog bite victim receives:
- Medical expenses
- Pain and suffering tied to the physical injury
- Emotional distress that flows from the physical injury
- Lost wages, when they are part of a physical injury settlement
What Parts of a Settlement Can Be Taxed?
Punitive Damages
Punitive damages punish the defendant rather than compensate you. They are generally taxable, even in a physical injury case. They often come up in drunk driving cases.
Interest
Interest paid on a settlement or judgment is generally taxable income.
Emotional Distress Without a Physical Injury
If your claim is for emotional distress alone, with no physical injury, the payment is generally taxable. The IRS allows an exception for medical costs you paid to treat that distress, as long as you did not already deduct them.
Medical Expenses You Already Deducted
If you deducted medical costs on a prior tax return and later recover them in a settlement, that portion may be taxable. Keep records of any medical deductions you took.
Does Georgia Tax Injury Settlements?
Georgia’s income tax generally starts from your federal adjusted gross income. Amounts excluded federally are generally not taxed by Georgia either. Taxable parts, such as punitive damages and interest, are usually taxable at both levels.
Why the Settlement Agreement Matters
How the agreement describes the payment can affect how it is taxed. A clear allocation helps show which amounts are for physical injury and which are not. Your lawyer should review this language before you sign. Our guide on what to consider before an out-of-court settlement covers other terms to check.
Out-of-Court Settlement vs. Verdict: Is the Tax Different?
No. The tax treatment depends on what the money is for, not how the case ended. A settlement and a jury award for the same physical injury are treated the same way. See settlement vs. verdict for other differences.
What About Attorney’s Fees?
In a physical injury case, the full recovery is usually excluded, including the part paid to your lawyer. The fee itself does not usually create a separate tax issue for you. Learn how contingency fees work.
FAQs
Do I have to report a personal injury settlement on my taxes?
Amounts excluded for physical injury generally do not need to be reported as income. Taxable parts, like interest and punitive damages, do. Ask a tax professional about your specific settlement.
Is a car accident settlement taxable in Georgia?
Usually not, if it compensates you for physical injuries. Punitive damages and interest are the main exceptions.
Are lost wages in an injury settlement taxable?
Generally no, when they are part of a settlement for a physical injury.
Is a wrongful death settlement taxable?
Compensatory wrongful death damages are generally excluded. Punitive damages usually are not. See our wrongful death attorneys page.
You may also want to read about whether you can go to jail for losing an injury suit and what happens if you don’t hire a lawyer.
Talk to an Atlanta Personal Injury Lawyer
We are not tax advisors, and you should confirm your situation with a CPA. We can make sure your settlement is structured and documented clearly. The Atlanta personal injury attorneys at Humphrey & Ballard Law handle car accident and other injury claims. Call 404-446-9854 or contact us to review your settlement offer.
