- Mark as New
- Bookmark
- Subscribe
- Subscribe to RSS Feed
- Permalink
- Report Inappropriate Content
Get your taxes done using TurboTax
Any settlement for physical injury is never taxable, even if the amount is more than your medical expenses.
On the other hand, if part of the settlement is for punitive damages (to punish the other driver) or is for interest (because the judgement was paid late), that portion is taxable, even it if is less than your actual injuries.
However, if you received a previous tax benefit from the medical expenses, you have to pay tax on that part of the settlement since it is a reimbursement of a previous tax deduction. This is called a "taxable recovery." If you paid your out of pocket costs from an HSA or MSA (tax-free money) then that part of the settlement is a taxable recovery since you previously paid with tax-free money. Or, if your expenses were large enough that you took an itemized tax deduction, then part of the settlement is taxable, but only to the extent the deduction was actually deductible. (For example, if your bills were $10,000 and your gross income was $100,000, then you could only deduct $2500—the amount that your bills were more than 7.5% of your income. That would mean that $2500 of the settlement is a taxable recovery but not the entire settlement, since the tax benefit of the deduction was only $2500.)