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Is a medical injury settlement non-taxable if the settlement doesn't specifically state it isn't punitive?

Princeton, NJ |

My wife was disfigured as a result of medical negligence during surgery, and negotiated a settlement with the hospital.

Our accountant says that since the settlement doesn't specify that the payment is not punitive it is taxable income - although the settlement says "...has alleged negligent acts or omissions by Releasees during Releasor’s medical services. Releasors seek to recover monetary damages as a result of those alleged acts or omissions which resulted in injuries to Releasor. WHEREAS, Releasors and Releasees wish to resolve the issues still pending between them without the need and expense of litigation and without any admission of liability."

Is he right?

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Attorney answers 8

Posted

The settlement needs to be structured correctly by a lawyer. Many times insurance companies take money from different accounts which needs to be checked by a lawyer. Lastly, without a lawyer, your wife is likely getting an itsy bitsy fraction of the true worth of the case....it's called a nuisance settlement. Why not retain a lawyer to get the maximum possible compensation available under NJ law? Make sense?

Posted

I am not an accountant. However, the IRS code states that funds received on account of personal injury claims are not taxable income. You need to consult with an attorney before you sign anything. I suspect the hospital is trying to pay from an account different from their insurance funds. That way, they can try to get around malpractice reporting requirements. They can expense the payment. You can pay taxes on it. See an attorney now.

Posted

It is very foolish to settle a case such as this without an attorney. This is just one of many issues that can and will become problematic.

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Posted

Non taxable in NJ. There are some situations it can be, this is unlikely to be one.

Each case is fact sensitive, so all answers should be viewed as general advice only, and should never replace a thorough and in depth consultation with an experienced attorney. Further, an answer should not be seen as establishing an attorney-client relationship.

Posted

You would be well-advised to consult an attorney prior to settling such a claim, if you haven't already done so. An attorney still may be able to reach a settlement without litigation. However, I am puzzled by what your accountant is saying. It seems to me to be a contradiction, in that I have not heard of a "punitive" settlement. Punitive damages typically refer to a judgment. If no liability is admitted nor adjudged, how can there be a punitive component?

Answers to questions here are NOT intended as, and do not constitute, legal advice; they are not a substitute for individual consultation with an attorney of your choosing. An answer to a question here does not form an attorney-client relationship. Many legal matters are subject to statutes of limitations, meaning that after a certain period of time you may lose your right to bring a claim, or to file a lawsuit, forever. Most public agencies or other agencies have the right to be informed of a potential lawsuit within a specified period of time, and in a formal manner, which may be as short as weeks or months, and after that time you may not be able to make a claim against them. Therefore, you should personally and individually consult with an attorney who practices in your state or jurisdiction immediately in order to preserve your rights.

Posted

In my opinion, he is wrong. You should seek the assistance of a tax attorney. This is a personal injury case where you are being compensated for you injury.
Federal tax law states: "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—

. . .

(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; "
This settlement was not a settlement that included punitive damages. Settlements rearely if ever include punitive damages. Thus the opposite of what the CPA said is true. Unless the settlement specifically says that some of it is for punitive damages, none of it is for punitive damages. If part of the settlement reimbursed you for medical expenses that you deducted on a prior tax return, then that part of the settlement is taxable. The rest is not.

Peter I Berge

Peter I Berge

Posted

Additionally, it seems to me that the explicit denial of admission of liability would serve as a de facto statement that there are not punitive damages contemplated. Perhaps the accountant needs to speak with a tax attorney or further research the issue.

Thomas J. Wagner

Thomas J. Wagner

Posted

I agree. I think the CPA should not try to interpret taxability of legal settlements and refer those questions to tax lawyers. Clearly this was not punitive damages. In PA I don't think you can get punitive damages on a suit based on mere negligence.

Posted

It is hard to give a definite answer based on your post, but generally speaking under the IRC code, if you sustain a personal injury and you are compensated for that personal injury, then it is generally considered non-taxable. Punitive damages are generally considered taxable by the IRS. If the complaint that frames the action alleges both punitive damages and compensatory damages, i.e. damages to compensate for personal injury, and the case was settled with that complaint still framing the case, then the IRS might question whether a portion of the settlement was taxable because a portion of the settlement resolved the punitive damages case. The IRS is not bound by the terms of the settlement. Also, if there is a confidentiality provision, then please read the famous Dennis Rodman case (Commissioner v. Macomber) where the IRS successfully argued that part of the settlement was for confidentiality and therefore that part of the settlement was taxable. It is not possible to determine whether any of this applies to your case based on the post. I would go back to your personal injury attorney and ask these questions. He may refer you to a tax lawyer, and you may want to look at the interrogatories and discovery responses to see what claims have been alleged. Good luck.

The answer to this question is for general purposes only and does not establish an attorney-client relationship, and is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation.

Posted

Get a new accountant. Not taxable. Punitive damages have nothing to do with anything under the facts that you have stated. Consult a lawyer to make sure the settlement is fair and adequate.

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