You might have to pay taxes on some portions of your medical malpractice award. The IRS considers some aspects to be taxable income for purposes of your federal income tax return, but other parts are not. Georgia will only tax your medical malpractice award if the IRS does.
How to Determine How Much of Your Medical Malpractice Award is Taxable
You have to break your settlement or award down into its various components to find out how much of it is taxable. The main areas of medical malpractice compensation cover four areas.
Physical Injuries or Illness
You will not have to pay taxes on the part of your award the legal documents designate for your physical injuries or illness. If you deducted your medical expenses from your taxes in a prior year and got a tax benefit by doing so, you will have to include the amount deducted from your taxes. It will be “other income” on line 21 of your federal income tax Form 1040.
Compensation for lost wages are subject to federal and state taxes and Social Security and Medicare taxes. The reason you have to pay all these taxes on this portion of your settlement is that these funds replace the wages you lost because of the malpractice, and wages are taxable.
Emotional Distress or Mental Anguish
If the damages for your distress were because of a physical illness or injury, the compensation is not taxable. You will have to claim taxable income as any deductions you took for those medical expenses on your taxes in previous years, if you received a tax benefit from those deductions, just like with medical expenses for physical injuries or illnesses. On the other hand, if your emotional distress or mental anguish was not the result of physical injury or illness, your compensation is taxable, subject to reduction by certain medical expenses for treatment of your distress.
The IRS will tax the portion of your award designated as punitive damages, whether for physical injury or illness, for mental distress, or some other reason. Include this portion of your settlement on line 21 of your federal income tax Form 1040 as “Other Income.”
Taxes on Interest You Receive on Your Medical Malpractice Award
Sometimes judges award interest on damages awards to compensate the successful plaintiff who had to wait a long time to get paid, particularly if the case went up on appeal. You will have to pay taxes on the interest you receive on your award. The amount will go on line 8a of your IRS Form 1040 as “interest income.”
IRS Publications with Additional Information on the Taxability of Medical Malpractice Awards
The IRS provides two publications to help you sort out the taxability of your malpractice compensation.
The Law Office of Jason R. Schultz, PC handles medical malpractice and personal injury claims. We are not tax lawyers. This article is for informational purposes only. You should talk with a professional tax advisor about the tax issues of your medical malpractice award.
For a free consultation and case evaluation of your medical malpractice claim, please call us at 404-474-0804.