Do you have to pay taxes on a medical settlement award?

[Indiana_Dem]

I was in a car wreck and just received my settlement. Owing to the fact that you have to pay taxes when you win the lottery and things such as that, would i have to pay taxes on my awarded settlement?

Sorry for the off-the-subject question but i thought maybe someone here has experience.

[happyslug]

1. Depends on what the Medical settlement covers

For example if the Medical Settlement is for the lost of use of an arm, that is NOT taxable, but if the Settlement covers lost wages, than it is taxable.

As a general rule a medical settlement are "damages" and as such NOT income and thus NOT taxable. There are exceptions (Mostly to do with the issue of "lost wages").

Depending on the amount involved I would see an CPA on how to handle the settlement.

[Indiana_Dem]

2. About $700 was in lost wages

$5000 was in medical costs, the rest was in personal injury (had a compression fracture that they said wasn't a compression fracture). I bickered with them until I got $4750 for the injury. But they paid me in a lump sum.

[happyslug]

9. Except for the $700 in lot wages, the rest is NOT INCOME

Income is a basic concept of the Income Tax system. With an Income tax you are taxing INCOME not WEALTH or Property. Your body is your property and any payment for compensation of damages to your property is NOT INCOME.

Now the "lost wages" is income and thus subject to IRS rules. I mention the difference for what is Income is really not defined completely in either the Income Tax code or the IRS Regulations. I would follow the Regulations as far as possible but remember the concept that damages are NOT INCOME.

[efhmc]

3. No, you do not.

[A HERETIC I AM]

4. got to the I.R.S. website and search

WWW.IRS.GOV

use their search feature and download the .pdf file of the publication you need. It wont take too long.

[mermaid]

5. I Suspect You Will

It may be there is a exception for the amount which is recoupment for actual damages incurred, doctor bills, hospital bills, out of pocket expenses, etc. But any portion of the settlement which is designated for "pain and suffering" I suspect you will have to pay tax on it.

Didn't used to be that way about 8 years ago, but then they closed to lawsuit settlement tax loophole.

Recently, I settled an employment-discrimination case, and I had to pay taxes on it.

This is why I'm still on a payment plan (damn IRS) because I used virtually all of the settlement to get myself back whole to where I was before the discrimination occurred....settling very old debts, getting new furniture, a newer car, etc.

But I had to pay social security and medicare taxes, as well as income taxes on the portion of the settlement designated as "back wages" and income tax only on the portion designated for "emotional injury and suffering, and humiliation."

At least, with a medical settlement, you won't have to pay any social security or medicare taxes...unless some of the settlement is designated for lost wages.

Check also with your state, if this is a worker's compensation case, you may be required to reimburse workman's comp.

I know this is the case in PA, because UI was in a car wreck on the job, and, when I settled, I had to reimburse workman's comp.

I'm no CPA...speaking only from my own experiences here, so do not take anything I have said as official legal or financial advice. I'd ask a tax attorney, if you want actual legal advice regarding the taxability of your settlement. But I suspect you may not like what the advice you are given will be...and that is...yes, you will have to pay taxes on at least a portion of the settlement.

No, Virginia, there no longer is anything such as a free lunch in America!

[Indiana_Dem]

6. Thank you very much for your input!

I will check out the IRS website.

[intheozone]

7. Recovery for personal injuries are not taxable

per Internal Revenue Code section 104. If you recover damages on account of an actual physical injury, whether as payment for pain and suffering or compensation for medical costs, they are excluded from income.
If part of the recovery is paid to compensate you for lost wages or say replacement of a damaged vehicle, those parts are not excluded from income.
It is wise to structure any settlement so the largest, if not all, is paid as compensation for the injuries. Even if the payor gives you a form 1099 reporting the payment, if the recovery is on account of personal injury, you do not have to include it in your income.
Don't know what state you are in, but most state's conform to the IRS code in determining what is and is not excludable from income. You should check with your state's tax agency to be sure.

[Indiana_Dem]

10. Well they didn't give me a form for the

vehicle settlement or the medical part of the settlement so maybe that's a good sign.
I live in Indiana. This was from a motor vehicle accident where my car was totaled and we had to get a new one.

[eileen from OH]

8. Is it from the insurance company?

I got some money from a fall (for medical bills and pain and suffering) and didn't have to pay.

eileen from OH

[happyslug]

11. Here is the Statute and Regs:

This is covered by 26 CFR Section 1-104-1 (The IRS Regulation Section 1-104-1)

Sec. 1.104-1 Compensation for injuries or sickness.

(a) In general. Section 104(a) provides an exclusion from gross income with respect to certain amounts described in paragraphs (b), (c), (d) and (e) of this section, which are received for personal injuries or sickness, except to the extent that such amounts are attributable to (but not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year. See section 213 and the regulations thereunder.

(c) Damages received on account of personal injuries or sickness. Section 104(a)(2) excludes from gross income the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness. The term ``damages received (whether by suit or
agreement)'' means an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution.



Also Covered in the the IRS Code (The Income Tax code as passed by Congress)26 USC § 104:

(a) In general - Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include -
(1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness;
(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;

US Internal Revenue Code (title 26 USCA § 104):
http://caselaw.lp.findlaw.com/scripts/ts_search.pl?title=26&sec=104

Copy of the IRS Regulations see:
http://www.access.gpo.gov/nara/cfr/waisidx_03/26cfr1v1_03.html

For Regulation 1-104 see:
http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/cfr_2003/aprqtr/26cfr1.104-1.htm

The Complete Code of Federal Regulations:
http://www.access.gpo.gov/nara/cfr/cfr-table-search.html

My position would be that the whole lump sum is compensation for damages and thus NOT Income. I would still have some questions as to the $700 in "lost wages" but I would be tempted to tell you to treat the WHOLE settlement as damages and not report it to the IRS. Leave the IRS worry about collecting its taxes on that $700.

Now if the Settlement clearly states that $700 is for "lost wages" than I would pay taxes on it, but most such settlements the listing is NOT what is being paid, but how the insurance company came up with its offer. Your acceptance of that offer does not always mean you accept the other sides charertestic of the offer, you may view the whole amount as compensation for damages.

The issue is what amount of the settlement is for "lost wages"? Given than no court made that decision it is still up to the parties to decide. You never agreed that $700 of the settlement was for "lost wages" therefore what the otherside called it is not binding on you.

Unless you signed something that says you accept the charteristic of the settlement, you can treat it as compensation for damages. Just signing papers that you accepted the offer does not always mean you accept HOW the other side view the offer. All you generally accept is the money.

Thus unless something shows you agreed (Or a court found) that the $700 was for lost wages I would treat the whole amount as damages and thus not taxable.

[Indiana_Dem]

12. Thanks for your effort

I really appreciate the time you took for me!
I feel a little better now.