Are Medical Malpractice Settlements Taxable?
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. Below, our medical malpractice attorneys at Dempsey Kingsland Osteen explain the situation and if the awards are taxable.
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.
If you receive a settlement for lost wages, these earnings are considered taxable income.
Punitive damages are considered taxable income and should be included in the “Other Income” section on your tax documents.
If you’ve experienced medical malpractice, you may be able to recover damages for your injuries or illness. Don’t wait to contact our firm with your case right away.