Most compensation for physical injuries or illness in a medical malpractice settlement isn’t taxable. If the payment is solely for the harm you suffered, the IRS typically doesn’t tax it. However, settlements covering lost wages or punitive damages are taxable. Emotional distress damages are taxable unless directly linked to a physical injury.
If you’ve received a settlement from a medical malpractice lawsuit, depending on the circumstances, you may need to claim the income on your annual taxes. These circumstances include physical injury or illness, emotional distress, or if you had recovered lost wages or punitive damages.
Below, our medical malpractice attorneys at Dempsey Kingsland Osteen explain the situation and whether the awards are taxable.
What Part of a Malpractice Award Is Taxable? Understanding What the IRS Expects
When Kansas City residents receive compensation for a medical malpractice case, one of the most common questions they ask is, Are medical malpractice awards taxable? While the IRS offers general guidance, the answer can still be complicated depending on the specifics of your award. Some components of a settlement are fully exempt from taxes, while others, like compensation for lost income, are taxable under federal law.
Taxes on Physical Injury or Illness
According to the Internal Revenue Service (IRS), if you attained compensation for personal physical injuries or sickness and didn’t receive an itemized deduction for your medical expenses regarding the injury or illness in years prior, you don’t have to pay taxes on that money.
However, if you deducted medical expenses related to your illness or injury from your taxes in years past, you’ll need to include that portion of your settlement in your income, so long as you receive a tax benefit as a result. If you paid for your medical expenses over the course of more than one year, you’ll need to allocate the portion of the compensation for medical expenses for all the years in which you paid.
See what our clients have to say about our services:
Taxes on Emotional Distress or Mental Anguish
If you experience emotional distress or mental anguish as a result of the medical error, the compensation for these damages is treated the same as compensation from a physical injury or illness.
However, if you receive compensation for emotional distress or mental anguish that didn’t emerge due to the medical error, you’ll need to incorporate them into your income. Although, the amount you’ll need to include is decreased by the following:
- Money paid for medical expenses related to emotional distress or mental anguish that you haven’t already deducted; and
- Money regarding emotional distress or mental anguish that’s related to your medical expenses as a result of the medical error that you’ve deducted in years prior but didn’t receive a tax benefit.
In your tax documents, be sure to include a statement that provides the whole settlement amount, not including medical expenses that weren’t deducted prior and medical expenses that you deducted but didn’t receive a tax benefit for.
Taxes on Lost Wages
Settlement payments for lost wages are treated as taxable income. This is because they replace income you would have otherwise earned and reported on your tax return, making them subject to federal and state income taxes.
Taxes on Punitive Damages
Punitive damages are considered taxable income and should be included in the “Other Income” section on your tax documents. Courts use punitive damages to punish the wrongdoer rather than compensate you for a loss. Still, the IRS requires full reporting and taxation of them, regardless of the underlying injury.
Do I Have to Report Settlement Money to the IRS?
Another common question is, Do I have to report settlement money to the IRS? The answer depends on the nature of the compensation received. While certain portions—such as compensation for physical injuries—are not taxable, you may still be required to disclose the settlement to the IRS when filing your taxes.
IRS Form 1040 is typically used for this purpose. If your settlement includes both taxable and non-taxable components, you must include a written statement with your return explaining how much of the award is being included and why. This ensures you are properly documenting your income in the event of an audit.
State-Level Considerations in Missouri and Kansas
Residents of Kansas and Missouri should be aware that federal tax guidelines apply nationwide, but state income tax rules may differ slightly. Fortunately, both Kansas and Missouri follow the IRS guidelines regarding excluding compensation for personal injuries from taxable income.
However, each state may have additional reporting requirements. For example, the Missouri Department of Revenue generally adheres to federal tax treatment but encourages taxpayers to maintain records of settlement allocations in case of audit. Similarly, the Kansas Department of Revenue states that “federal adjusted gross income” is the starting point for calculating state income tax, so taxable portions of a malpractice settlement, like lost wages, would also affect your state taxes.
Final Thoughts: Are Medical Malpractice Awards Taxable?
To recap: Medical malpractice awards may be taxable. Compensation for physical injuries or illnesses is generally not taxable, while other types of compensation, such as lost wages or punitive damages, must be reported to the IRS.
If you’ve received a malpractice settlement in Kansas City, we recommend you consult with a tax advisor and an experienced medical malpractice attorney to ensure full compliance with both federal and state tax laws. Every case is unique, and proactive planning can help you avoid unnecessary tax burdens while protecting the compensation you deserve.
Still have questions? Contact Dempsey Kingsland & Osteen today. We proudly serve clients throughout Kansas City, Missouri, and Kansas and are here to help you navigate the legal and financial aftermath of medical malpractice.
Where to find our Kansas City, MO office:
Loading...