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Do I Have to Pay Taxes on my Personal Injury Settlement?

Damages in a personal injury case can broadly be described as either compensatory or punitive. Compensatory damages are meant to compensate the plaintiff for injuries and damages they received as a result of another party’s negligence. Punitive damages are meant to punish or deter the at fault party for bad behavior. With compensatory damages, the plaintiff is able to recover what are called “general damages” and “special damages”. General damages, commonly referred to as pain and suffering, are essentially the non-economic damages that are incurred as a result of the at fault party’s negligence.  This particular category of damages can also be described as past and future pain that were caused by the accident. O.G.C.A §51-12-2 states that general damages are those which the law presumes to flow from any tortious act, and they may be recovered without proof of any amount. With general damages, the amount of compensation the plaintiff is owed is determined by the” enlightened conscience of an impartial jury”. In contrast, Special damages are those which actually flow from the negligence of the at fault party and must be proven in order for the plaintiff to recover. These typically come in the form of medical bills, repair bills for vehicles and pay stubs which reflect lost wages.

The Federal Tax Code has specific rules governing the taxation for compensation for injuries or sickness. Per 26 U.S.C. §104 (a), gross income does not include:

  • amounts received under workmen’s compensation acts as compensation for personal injuries or sickness.
  • the amount of any damages (other than punitive damages) received on account of personal physical injuries or physical sickness.
  • amounts received through accident or health insurance for personal injuries or sickness
  • amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces
  • amounts received by an individual as disability income attributable to injuries incurred as a direct result of a terroristic or military action

Hence, compensatory damages are not considered as income for taxation purposes. This includes expenses such medical bills, lost wages, damage to a vehicle, damage to other personal property and pain and suffering. There is generally a significant loss associated with an injury case. Compensatory awards are meant to make the injured plaintiff whole again. Punitive damages, although they may also be awarded with compensatory damages, serve the purpose of punishing the at fault party and deterring the conduct that caused the injury. Therefore, punitive damage awards do not have the same tax-exempt status as compensatory damages. The Faucette Law Firm, LLC specializes in personal injury cases. We assist clients with car accidents, motorcycle accidents, nursing home abuse, premises liability, truck accidents, animal bites and wrongful death cases. We serve Atlanta, Fulton, Cobb, DeKalb, Douglas, Henry, Fayette, Gwinnett, Paulding, Carroll, and Coweta. Contact our law firm today for a consultation.