If I paid medical expenses but collected on a settlement that covered the expenses, can I still deduct them?

[justinwalden13]

I was told that the money from the settlement was not taxable. It was a civil Lawsuit...?

[MargaretL · Accepted solution]

No, you cannot deduct medical expenses for which you have been paid. Any medical expenses that have not been covered by the settlement are deductible, though.

As to the settlement itself... if your civil lawsuit is relate to physical injuries it is non-taxable.  This includes awards for compensatory damages, including lost wages received as a result of the physical injury. However, punitive damages, emotional distress or mental anguish, employment discrimination or injury to reputation are generally taxable and should be reported as “other income” online 21, form 1040. For more information on Settlements and their taxability, please click here.

If your settlement is taxable, her is data entry:

1. Federal Taxes
2. Wages & Income
3. Scroll down to Less Common Income
4. Select Miscellaneous Income 1099-A, 1099-C
5. Scroll down to Other Taxable Income - enter a description and amount; the income will be reported on line 21, Form 1040.

[malmstorm]

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@MargaretL wrote:

No, you cannot deduct medical expenses for which you have been paid.

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Can you elaborate on this? How did you make this determination? The IRS Publication 502 "Medical and Dental Expenses" does not explicitly state whether or not you can deduct medical expenses if you received an amount in settlement of a personal injury suit, of which part of that award was for medical expenses. The "Damages for Personal Injuries" section just discusses medical expenses deducted in a previous year and future medical expenses.

[PaulaM]

@malmstorm If you have been reimbursed for medical expenses through a settlement for personal injury, then there is not a medical expense to deduct. Expenses are recovered in this case. There is no deduction to take because there is no expense.

See this link for more details.

[Jenniferm0401]

How does this work if you received a settlement- however, that settlement went to pay the lien of medical bills.  So you personally did not gain money- the money was paid from the attorney to the medical lien.

[VictoriaD75]

You can only deduct medical expenses that you paid out of pocket. As a similar example, if your medical expenses are covered by insurance, they are not deductible.

Per IRS Publication 502:

You must reduce your total medical expenses for the year by all reimbursements for medical expenses that you receive from insurance or other sources during the year.

IRS Publication 502

[sundollar2]

When I receive settlement, it must be income tax deductible for medicinal lines what I already paid?

[Opus 17]

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@sundollar2 wrote:

When I receive settlement, it must be income tax deductible for medicinal lines what I already paid?

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A settlement for illness or injury is not directly taxable, but you may not claim a tax deduction for medical expenses if they were paid with non-taxed money.  If you took a tax deduction and are reimbursed later tax-free, you have to repay the deduction. 

For example, you were injured in 2019 and paid $50,000 of medical expenses.  You claimed this as an itemized deduction on your 2019 schedule A.  Because of the 7.5% income limit, your actual deduction was $20,000.  In 2020, you received a settlement for your injuries in the amount of $45,000.  It's not taxable income by itself, but since this is more than the $20,000 medical expenses deduction, you have to pay back that deduction.  You list it as a "taxable recovery" (reimbursement of a previous tax deduction) in the Other Uncommon Income section of Turbotax.

On the other hand, suppose your medical expenses were only $5000, and you did not itemize your deductions that year.  Then, your $5000 settlement is not taxable and you don't have any deduction to repay. 

Any part of the settlement that is for punitive damages or interest is always taxable.  Damages for pain and suffering are not taxable if the pain and suffering was due to a physical illness or injury, but pain and suffering settlements are taxable if the original injury was not physical. 

[dmoncrea]

If I settled a discrimination lawsuit and I was issued a check for taxable emotional distress, can I deduct the medical expenses I paid out of pocket - even if they weren't greater than 7.5% of  my adjusted gross income?  (I'm itemizing).   For example, if my settlement was $200,000 and I added this as a 1099-M taxable income and I had 5k in medical expenses, but no other medical expenses to claim, is there a way that I can deduct the 5K?  If so, how would this be done in TurboTax Premier?

[macuser_22]

Only if you have unreimbursed medical expenses that exceed 7.5 of your AGI then the amount that is greater then 7.5% of AGI  can be an itemized deduction.

[MarilynG1]

@dmoncrea If you are not Itemizing Deductions, you won't be able to claim your Medical Expenses (especially if they don't exceed 7.5% of your income).

You could enter them in your Federal return, though.

Your State may let you claim Medical Expenses that you weren't able to claim for Federal.

Click this link for more info on Medical Expenses. 

[Opus 17]

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@dmoncrea wrote:

If I settled a discrimination lawsuit and I was issued a check for taxable emotional distress, can I deduct the medical expenses I paid out of pocket - even if they weren't greater than 7.5% of  my adjusted gross income?  (I'm itemizing).   For example, if my settlement was $200,000 and I added this as a 1099-M taxable income and I had 5k in medical expenses, but no other medical expenses to claim, is there a way that I can deduct the 5K?  If so, how would this be done in TurboTax Premier?

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My colleagues both missed the special rules for settlements of this type.  See here,

https://www.irs.gov/pub/irs-pdf/p4345.pdf

If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income. However, the amount you must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit. Attach to your return a statement showing the entire settlement amount less related medical costs not previously deducted and medical costs deducted for which there was no tax benefit. The net taxable amount should be reported as “Other Income” on line 21 of Form 1040, Schedule 1.

So you can deduct the cost of medical attention that was due to the emotional distress "right off the top" of the taxable settlement, as long as you did not previously take a schedule A itemized deduction for the same expense.  To do this in Turbotax and be able to e-file, you would enter the settlement income, then create an item of "other income" with a negative number in the amount of the medical expense to offset the income.  I would give it a description like "Medical expense per pub. 4345".

Or, you can file by mail.  don't enter the 1099-MISC into your return.  Enter the net amount after subtracting medical expenses as "other non-wage income" and attach a copy of the 1099-MISC and a written explanation to your return when you mail it. 

[Mnbogboy]

I have been trying off & on all day to get started filling in numbers. Is or will a form come up for me to fill?

[Mnbogboy]

Text me answers at [phone number removed] also i was sent two different verification codes.

[dmoncrea]

I think you colleague provided the correct answer below and cited his resources.