Are Medical Malpractice Settlements Taxable?

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How much does a malpractice lawyer cost? Malpractice lawyers can charge clients in different ways to handle their cases.

How you pay and the rate you pay will depend on the attorney or law firm’s preferences, experience level, and geographic region.

Additionally, some types of cases are better suited to certain types of fee arrangements than others. Three of the most common methods that lawyers use to charge for their services are flat, hourly, and contingency fees.

Flat Fee

Flat fee arrangements are gaining popularity, particularly with attorneys who provide unbundled services. Under this fee structure, the client pays the attorney a fixed amount to handle a portion or all of the case.

For example, the attorney may help the client prepare or file paperwork or appear on their behalf in a single court hearing.

Typically, this arrangement is better suited to straightforward and routine matters rather than complex lawsuits where there are critical questions about liability that need to be addressed.

Hourly Fee

The hourly fee arrangement is a standard structure used in many cases where the amount of work the case will involve is variable or difficult to anticipate. In an hourly fee arrangement, the attorney charges the client an hourly rate to handle the case.

Usually, the attorney will ask that the client pay an upfront sum that the attorney deposits into a trust account. As the attorney performs work on the case, they withdraw earned funds out of the trust account.

When the funds are depleted, the lawyer may require the client to deposit an additional lump sum before they perform more work on the case.

Alternatively, the attorney may send the client a monthly bill to charge for their services after the retainer runs out.

Contingency Fee

Contingency fee arrangements are a common method of charging clients to handle personal injury and medical malpractice cases.

When a contingency fee structure is being used, the client does not pay any attorney fees upfront. Under this structure, the attorney receives a fixed percentage of the compensation they win on the client’s behalf.

If the attorney does not win the case, they rarely get any money for their legal services. Some attorneys may still bill clients for administrative costs, such as filing fees, under this arrangement, while others do not.

If you’ve received a settlement from a medical malpractice lawsuit, depending on the circumstances, if the injury was due to physical injury or illness, emotional distress, or if you had recovered lost wages or punitive damage, you may need to claim the income on your annual taxes.

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 received 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.

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 applicable to emotional distress or mental anguish that you haven’t already deducted.

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.

Lost Wages

If you receive a settlement for lost wages, these earnings are considered taxable income.

Punitive Damages

Punitive damages are considered taxable income and should be included in the “Other Income” section on your tax documents.

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