Is the money received in a medical lawsuit settlement taxable?

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larrygates | College Teacher | (Level 1) Educator Emeritus

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As a general rule (and this may vary from state to state, actual damages for injuries sustained are not taxable. This would include things such as medical bills, hospital bills, nursing care, medications, etc. Pain and suffering, to the extent they are considered actual damages, would not normally be taxable. However, if part of the damage award is for lost wages, these would be taxable. If one were not injured and earning income, that income would be taxable. Since the damage award replaces the income not earned, that portion of the award would indeed be taxable.

If the award is for punitive damages, then the amount recovered is indeed taxable. These are "punishing" damages, intended to inflict some pain on the defendant for his wrong. Since there was no loss whatsoever to the plaintiff reflected in punitive damages, any such award is taxable as ordinary income.


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