Are Personal Injury Settlements Taxable in Georgia?

What Is Not Taxable: Compensatory Damages

Compensatory damages are intended to “make you whole” for losses that are directly related to your personal injury. You can think of compensatory damage awards not as taxable income or “gains,” but as reimbursement.

A classic example of compensatory damages would be repayment for past and future medical bills. Other economic losses, like lost wages, wage-earning potential, long-term personal care needs, and costs to modify your living environment are also considered compensatory damages and are tax free as long as they related to your physical injury claim. (Lost wages would be taxable in non-injury cases like employment discrimination or defamation, but this is typically not the case for personal injury.)

For this reason, compensatory damages awarded in personal injury settlements are not taxed either by the federal government or the state of Georgia.

Again, the logic here is that, if you’ll need to pay $300,000 in medical bills and other direct costs (for example), it wouldn’t be fair to have to pay taxes on the $300,000 you receive in compensation. That $300,000 is not a “gain” for you, and taxing it would leave you with less than the full amount you need to cover those expenses.

RELATED: How Damages Are Assessed in a Personal Injury Case

What About Pain and Suffering (and Other Non-Economic Compensatory Damages)?

You might ask: What about things like pain and suffering, emotional distress, mental anguish, reduction in your quality of life, or other types of personal losses that don’t come with an obvious price tag?

The good news is that any type of compensatory damages, including non-economic damages, are non-taxable if they originate from a physical injury or physical sickness. In a personal injury case, that’s going to be true most of the time.

Mental anguish, emotional distress, or other non-economic damages that are not tied to a physical injury or condition would be taxed. But that scenario typically only applies to other types of civil cases unrelated to personal injury, such as employment discrimination or breach of contract.

Exception to the Rule: Previous Tax Deductions

Things might get tricky when you already deducted any out-of-pocket medical expenses on a previous tax return. This might happen if your injury occurred in one year, but you don’t receive your settlement or jury verdict until a later year.

For example, let’s say you were injured in 2020 and paid $50,000 in medical costs out of your own pocket. When you filed your taxes for 2020, you took an itemized deduction for those costs, which reduced your taxable income for that year.

If you then win a personal injury settlement or trial verdict in 2021 or later, you will need to pay taxes on $50,000 worth of compensatory damages that you are awarded.

RELATED: What Is Pain and Suffering Reimbursement? A Georgia Lawyer Explains