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Are Medical Malpractice Settlements Taxable?

Updated on August 16, 2016

When a patient has gone through the harrowing experience of suffering medical malpractice, and has successfully obtained compensation for their injury, they may be unsure of how the tax code applies to their court award or settlement. As with most tax-related issues, the answer to whether or not a medical malpractice award is taxable is not a completely straightforward one.

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For tax purposes, there is no difference between a malpractice award won at trial or a settlement obtained through negotiation. (In fact, the vast majority of malpractice cases settle out of court.) In a medical malpractice claim, a patient must prove that the negligence of the medical professional treating them led to physical injury. That point is important for tax purposes, because IRS policy states, “If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable.”

However, malpractice victims cannot automatically assume that their entire settlement amount is non-taxable. According to the expert attorneys at Hodes Milman & Liebeck LLP, there are important exceptions to the general principle that award amounts connected to a physical injury are exempt from taxes. For example:

  • In many states, victims may be awarded interest on a judgment dating from the date the case is filed until the date the award or settlement is paid. Such interest is taxable.
  • If the victim took a tax deduction on medical expenses incurred as a result of their injury prior to receiving their settlement, and a portion of the settlement is meant to compensate them for those bills, then that portion of the settlement may be taxable.
  • Any punitive damages are taxable.
  • Emotional damages are generally considered tax-free to the extent that they are connected to the physical injury a patient suffered.
  • While settlements for lost wages are usually considered taxable, that may not always be true, depending on the circumstances of the case.

In addition, while most state tax codes follow federal guidelines for medical malpractice settlements, it is always wise to double-check that this is the case in your state.

Knowing the differences between how categories of compensation are treated under tax law is important for structuring a settlement in a way that will retain the maximum amount for the benefit of the malpractice victim. An experienced malpractice attorney will not just fight for the maximum award possible for the plaintiff, but will do so in such a way that the compensation they receive is not reduced by avoidable tax obligations.

If you or a loved one has been a victim of medical malpractice, contact knowledgeable, professional attorneys that have the expertise to fight for your rights and obtain the compensation you deserve.

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