I seen you on Good Day Philadelphia today, and I’m glad there is someone out there that really knows what she’s talking about. I recently received a medical settlement the last week of December in 2008. The settlement I received was under 90,000, I don’t know if I have to pay taxes on this or not. I have three kids, so I immediately put money up for my kids. I paid my student loan off, & got current on some debt. I went to a credit counselor last month, & was informed I wouldn’t have to pay taxes, because it’s a medical settlement & not settlement from lottery, or property. Please I hope you can help! I didn’t know who to turn to or who to trust, in fear of being ripped off. I haven’t done my 2008 taxes yet….& I only have about $40,000 left which I put into a CD & money Market account. I even ask the bank Manager, she stated the bank will send me a tax form at the end of the year explaining the interest I earned on the money in my account, & I would have to report that…… I was so stressed before this settlement came , because of debt, & didn’t know if I should eat, or keep a roof over my head. But now I feel more stressed not knowing if I owe the Government…..
I would highly recommend that you check with your tax professional or an attorney to have them review the settlement proceeds. How the settlement is characterized will determine whether it’s taxable. Here are some general rules for federal purposes:
- To the extent that the settlement is for physical injuries, it is not taxable to you, assuming that you have not previously deducted those expenses. If you had already deducted the expenses, then they are includable as income to the extent of your deduction (i.e. part of your settlement is to reimburse you for a doctor’s visit and meds, if you already deducted the meds, you must include that portion as income on line 21 as “other income”).
- Punitive damages are taxable: it does not matter if punitive damages are related to a physical injury or physical sickness.
- Emotional distress or mental anguish damages are taxable to the extent that they exceed medical costs for treatment. As with physical injuries, any of the medical costs that were previously deducted must be included as income on line 21. You should also attach a statement to your return which clearly states the amount of the entire settlement less related medical costs.
- Employment discrimination or injury to reputation damages are taxable.
- Payments for property loss or loss of use are taxable as capital gain to the extent that they exceed your basis (cost) of your personal property; report those on Schedule D of your form 1040. If the payments are less than your cost, they are not taxable.
- Interest earned on the settlement, as you were told, is also taxable. Report that on line 8a of your form 1040.
Again, if you’re not sure how your settlement was structured, check with your attorney. He or she should be able to explain it to you. Good luck!
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