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.
Protect What You Recovered
Your Settlement Should Bring Relief, Not New Worries
After everything a medical error put your family through, the last thing you need is uncertainty about what you actually get to keep. Our Kansas City team can walk you through how your award is structured, answer your questions in plain language, and help you plan with confidence.
Schedule A Free ConsultationWhat 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.
Key Takeaways
Are Medical Malpractice Awards Taxable? What Kansas City Families Should Know
Whether medical malpractice awards are taxable depends on what each part of the payment is meant to cover. Here are the points our team reviews first with clients in Missouri and Kansas.
- Physical injury compensation is generally not taxed. The IRS typically excludes money received for personal physical injuries or sickness, unless you previously deducted related medical expenses and got a tax benefit from it.
- Lost wages and punitive damages are taxable. Lost wages replace income you would have reported anyway, and punitive damages must be reported as “Other Income” regardless of the underlying injury.
- Emotional distress depends on its source. When it stems from the physical harm of the medical error, it is treated like injury compensation; when it does not, it is generally included in income.
- Missouri and Kansas follow the federal rules. Both states exclude personal injury compensation, but taxable portions such as lost wages carry into your state return, so keeping clear settlement allocation records matters.
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.
Questions Are Normal
Feeling Unsure Before You Sign? Let’s Talk It Through
Settlement paperwork can feel overwhelming, especially when you are still recovering. You don’t have to sort it out alone. Our team will listen, explain what each part of an award covers, and help you figure out the right next step, with no pressure and no judgment.
Schedule A Free ConsultationState-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.
Frequently Asked Questions
Malpractice Settlement Tax Questions Kansas City Clients Ask
Generally, no. The IRS typically does not tax compensation received for personal physical injuries or sickness. The exception is when you deducted related medical expenses on a prior tax return and received a tax benefit from that deduction. In that case, the matching portion of your settlement may need to be reported as income.
Yes. Settlement payments for lost wages are treated as taxable income because they replace earnings you would have otherwise reported. That portion is generally subject to federal income tax, and in Missouri and Kansas it can also affect your state income tax, since both states start from federal figures.
Yes. Punitive damages are considered taxable income and are reported in the “Other Income” section of your tax return. Courts award them to punish the wrongdoer rather than to compensate you for a loss, so the IRS requires them to be reported and taxed regardless of the underlying injury.
You may still need to disclose it. When a settlement includes both taxable and non-taxable components, you typically include a written statement with your Form 1040 explaining how much of the award you are reporting and why. That documentation helps support your return if it is ever reviewed.
For the most part, no. Both states follow federal guidelines that exclude personal injury compensation from taxable income. Kansas uses federal adjusted gross income as its starting point, and Missouri generally follows federal treatment while encouraging taxpayers to keep records of how a settlement was allocated.
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, whether it’d be nursing malpractice, surgical malpractice, birth injury, or more.
Serving Kansas City
Medical Malpractice Settlement Guidance Serving Kansas City
If you are weighing a malpractice settlement and want to understand what each part of the award covers, our Kansas City office is here to help families across Missouri and Kansas. Use the map below to find us, then reach out to schedule a free, no-obligation consultation.
