Medical lawsuits compensate plaintiffs for a range of damages caused by medical malpractice, including pain and suffering, missed work, lost income and potentially even punitive damages. How much, if any, of the lawsuit award you have to share with Uncle Sam depends on how the award is broken down.
Physical Pain Damages
Any damages you receive for physical pain and suffering are excluded from your taxable income, but you do have to include any interest on the award. For example, if the doctor made mistakes during your surgery that caused you $250,000 of pain and suffering, you do not have to include that $250,000 as taxable income. However, if by the time the court hands down its judgment, it includes $25,000 in interest on the $250,000, that $25,000 of interest is taxable.
If part of your award from the medical lawsuit is for emotional damages, you may have to include that amount in your taxable income. If the emotional damages are paid in connection with a physical injury or illness, you don't have to include them in your taxable income. In addition, even if the emotional damages aren't connected to a physical injury or illness, you can exclude any portion of the damages that compensate you for medical care in connection with the emotional damage. But if you receive emotional distress damages for a non-physical injury, such as damage to your reputation, you must include the damages as income on your tax return.
Ordinary Income Replacements
Any time that the judgment includes damages intended to replace ordinary income items, you must include that portion of the damages in your taxable income. These damages can include interest on the award, compensation for missed work or other back pay. For example, if you missed work as a result of the medical malpractice for three months and your award included three months of salary replacement, you would have to include that portion of the award in your income.
Courts award punitive damages as a way to further punish the perpetrator for wrongdoing that was particularly reckless, irresponsible or even malicious. This amount can vary depending on the wealth of the defendant. Since this amount is on top of any compensatory damages for physical pain or emotional damages, this amount counts as taxable income and you will pay taxes on it at your ordinary income tax rate.
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