do you pay taxes on a lump sum payment settlement for a medical lawsuit?

Answer 1

To the extent that the settlement represents reimbursements of expenses that you were able to deduct in prior years, those amounts are taxable. As Tax CPA wrote, punitive damages are also taxable. Generally speaking, any other portion of the settlement is also taxable except that any portion representing personal PHYSICAL injuries or PHYSICAL sickness is excluded from taxable income. Amounts received as a result of MENTAL pain, sickness, or anguish are taxable.

One more thing... under a recent Supreme Court case, any amounts payable to your attorney directly from the settlement proceeds are also considered taxable gross income to you, even though you never received that money. You are allowed a miscellaneous itemized deductions for those amounts, although that deduction may not be very valuable depending on the rest of your tax picture.

Answer 2

cutiekelly is wrong (I love when people answer a tax question by deferring to a CPA :), thanks for nothing, right!). Lawsuit damages are non-taxable if they are compensatory in nature. However, punitive damages can be taxable. Compensatory damages represent compensation for some kind of damage done to you. They should not therefore be labeled as income because they are meant to restore you to your original status. Punitive damages however are meant to punish the defendant, and they end up putting the plaintiff in a better position than they were in originally.

Answer 3

only portions that exceed your tax-deductible medical expenses are taxable. consult a cpa.

Answer 4

Yes.

Answer 5

No.