Chances are, if you suffered injuries due to medical negligence, the tax consequences of a medical malpractice settlement are not at the forefront of your mind.
However, understanding medical malpractice settlements, taxable income, and how the two relate to one another are important considerations when deciding whether to accept a settlement.
In some cases, a medical malpractice lawyer can help reduce an accident victim’s tax exposure by carefully structuring the settlement.
At the law firm of Poulos & Coates, LLP, we have over 70 years of combined legal experience handling a wide range of medical malpractice cases.
We routinely secure favorable settlements on behalf of our clients, helping them move on with their lives after experiencing serious injuries.
Is a Medical Malpractice Settlement Taxable Under Federal Law?
After you realize you may have a valid claim for medical malpractice, multiple questions may arise as you consider your options.
One of those questions may be, Are medical malpractice settlements taxable? The short answer to that question is that it depends on a few factors.
As a general rule, medical malpractice settlements are broken down into a few different types of damages awards. Some types of damages are taxable while others are not.
The IRS provides guidance on its website for those looking to learn more about the tax implications of personal injury and medical malpractice settlements.
However, below is a summary of the IRS’s position on the taxability of settlements.
Past and Future Medical Expenses
One of the major components of any medical malpractice settlement is an award for past and future medical expenses.
This includes amounts that you have paid in the past, currently pending bills, and any medical treatment you may need in the future.
As a general rule, any compensation for past or future medical expenses is not taxable.
However, if you deduct some of the expenses that you previously paid, you must include the portion you claimed if doing so provided you with a tax benefit.
Also, if the settlement money is for medical expenses that you paid over the course of more than one tax year, you must prorate each expense to the year it was paid.
For example, you cannot apply all previously paid medical expenses—that you paid over multiple years—to a single year’s return.
This typically requires you to file an amended tax return.
Past and Future Lost Wages
If you suffered injuries as a result of a doctor’s negligence, it is likely you missed a substantial amount of work.
And, if your injuries were serious, you may not be able to return to work in the same capacity as before the incident.
A medical malpractice settlement should fairly compensate you for both the wages you couldn’t earn because of your injuries and any decrease in earning capacity due to your injuries or a resultant disability.
The portion of your medical malpractice settlement consisting of damages for past or future lost wages is taxable income.
This is because you would need to pay taxes on your wages had you been able to work.
Injuries related to medical malpractice can have a long-term impact on your physical and emotional wellbeing.
Non-economic damages are intended to compensate you for the emotional and psychological impact the healthcare provider’s negligence had on your life.
Whether non-economic damages are taxable depends on whether they were awarded based on your “physical injury” or “physical sickness.”
If so, then they are not taxable. However, if you receive non-economic damages unrelated to personal physical injury or physical sickness, you must pay taxes on that portion of the settlement.
Punitive damages are unlikely to be included in a medical malpractice settlement because they are only awarded in instances where a patient can prove that a practitioner acted with maliciousness, willfulness, recklessness, or fraudulent intent.
Courts award punitive damages after a trial on rare occasions.
But it is highly unlikely a provider would agree to pay punitive damages in a medical malpractice negotiated settlement—as that would be the equivalent of them agreeing to punish themselves.
However, when a settlement or court-imposed award includes punitive damages, a patient must pay taxes on that portion of the settlement.
Contact an Experienced New Mexico Medical Malpractice Lawyer for Immediate Assistance with Your Claim
If you recently suffered injuries as a result of a medical provider’s negligence, you may be entitled to a medical malpractice settlement.
If you want to learn more about when medical malpractice settlements are taxable, reach out to an experienced medical malpractice lawyer at Poulos & Coates, LLP.
We are unique among medical malpractice law firms in that we focus only on medical negligence cases, meaning we are uniquely positioned to successfully handle even the most challenging and complex cases.
Calling is free, and we will not bill you for our services unless we can recover compensation on your behalf.