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