Many clients often wonder if money received from an injury or death suit is taxable. While the short answer to this question is no, there are some exceptions of which clients should be aware.
Sustaining an injury is difficult enough on its own, and having to bring a lawsuit to obtain proper compensation and payments for your injuries only makes it more complicated and stressful. It would almost be unbearable if a victim had to pay taxes on the compensation he or she receives for injuries. Fortunately, the government has recognized that injury settlements do not qualify as earned income. Rather, these settlements are intended to compensate the injured victim for the pain, suffering, and disabilities he or she has suffered at the hands of another’s carelessness or negligence. As such, injury recoveries are not taxable.
Section 104(a)(2) of the Internal Revenue Code excludes from a person’s gross income any amounts received from personal injury awards. It provides that gross income does not include any damages received, whether by suit or agreement and whether these are received as lump sums or as periodic payments, on account of personal injury or sickness.
While the IRS code protects the monetary awards of most personal injury victims, there are some clear exceptions to this provision. For example, any money awarded as punitive damages is taxable. This is because punitive damages are primarily intended to punish and discourage the behavior exhibited by the defendant; they are not intended to compensate the plaintiff. Lost earnings are also taxable if a portion of the settlement is specifically designated as compensation for lost income. Further, any money paid for psychological injuries may also be taxed.
It is important for victims to understand that once settlement proceeds have been received, the taxability of that money is just like any other money they would invest or put in a savings account. When you invest your monetary award into taxable investments, any profit or gain you achieve is subject to taxes.
If you have been injured in an accident due to someone else’s negligence, you should contact an experienced Atlanta personal injury attorney who can help you seek compensation for your injuries.
Robert Webb is an Atlanta personal injury lawyer with Webb & D’Orazio, a law firm specializing in Atlanta personal injury, malpractice, criminal defense, and business law. Learn more at Webbdorazio.com.
