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mxhogue
New Member

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

I received an insurance settlement for pain and suffering from a car accident. My employer subrogated my settlement and took $20,000 for a medical lien against the benefits I used and $22,000 for the disability pay they paid me in 2016. Am I able to claim the $20,000 medical lien as a medical expense? Also, am I able to claim the disability pay? If so do I file an amended return or claim this when I file for 2017? Should my employer provide an updated W2 for last year since they were reimbursed for that amount and I was taxed on it?

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13 Replies

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

(Removed)

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

Please clarify.  There may be three or four separate tax issues here.

You received disability pay for 2016 that was included on a 2016 W-2? And then you had to repay some of that disability pay in 2017? That's one issue with a particular tax solution.  

Then you received an insurance payout and part of the payout was for lost wages? Was the lost wages part of the pay out the same as the amount of disability pay that you had to repay? Or more, or less?

Then, part of the insurance payout was for pain and suffering?

Then, part of your insurance payment was taken by your employer to reimburse your employer for the cost of your medical care? Was the employer a party to the lawsuit? Was the insurance policy paid for by the employer or was it a private policy?
mxhogue
New Member

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

I was paid disability pay in 2016 and the medical benefits used were primarily from 2016. In 2017 I received a personal injury settlement for my pain and suffering/medical expenses. I used medical benefits thru my employer to seek treatment and they paid me short term disability pay for the time I was out of work due to surgery and treatment. My employer filed a lien for the medical benefits used and a separate lien for the disability pay. They sent a copy of the lien to the auto insurance company, so they received payment for both liens and I was sent a check for the difference. The insurance company said they are required to pay liens that resulted from the accident prior to paying me. The disability pay was included and taxed on my 2016 W2. I just settled with the insurance company last week.
mxhogue
New Member

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

The settlement does not state it is for lost wages.
mxhogue
New Member

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

The auto insurance policy was not paid for by my employer.

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

The short answer is that you can't deduct the medical or disability liens because the settlement income is not taxable.

There is an overall tax law principle that tax deductions can be used to reduce your taxable income, but tax deductions can't be used if the income is not taxed in the first place, since there is no tax owed to be reduced.  The most common example of this is that you can't deduct medical expenses if they were paid from tax-free money, like insurance reimbursements or a tax-free health savings account.  

Legal settlements for personal injury are not taxable (including pain an suffering) unless part of the settlement is for back wages (because wages would have been taxable if you did the work, so the settlement for back wages is taxable even if paid by a person or insurance company who is responsible for your injury).

There is, of course, a procedure to deduct medical expenses.  There is also a procedure to deduct or take a credit for wages paid in one year that you have to pay back in a future year.  But these deductions do not apply in your case because the legal settlement is not taxable income.  Instead of receiving (let's say) $100,000 tax-free for your injuries, you received $58,000 tax-free after the liens.  Since the settlement is tax-free, you can't deduct those expenses.  You also can't deduct attorney fees if you paid them.

(If it was the case that part of the settlement was for back wages and you get a W-2 or 1099-MISC from the insurance company, then you can use those taxable settlement proceeds as the basis for a deduction for repaid wages that would cancel out some or all of the income.  We can tell you how to do that later if you end up getting tax documents for the settlement.)

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

If my husband had medical liens against our house for $56,000, he has passed away and I refinanced the house this year which paid the medical liens off, can I deduct the payment of the $56,000 on my 2020 tax return?

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.


@Idahonative2020 wrote:

If my husband had medical liens against our house for $56,000, he has passed away and I refinanced the house this year which paid the medical liens off, can I deduct the payment of the $56,000 on my 2020 tax return?


There are two complications here.

 

First, did you pay the medical provider (in order to remove the liens)?  If not, who held the liens and when was the provider actually paid and by whom?

 

Second, when did your spouse pass away and when did you pay off the liens?

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

The county paid the providers in 2010 and was the holder of the lien. 
My husband passed away in 2010 and the liens were paid off in 2020 in a lump sum. 

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.


@Idahonative2020 wrote:

The county paid the providers in 2010 and was the holder of the lien. 
My husband passed away in 2010 and the liens were paid off in 2020 in a lump sum. 


No, you can not consider the paid liens as deductible medical expenses.  Medical expenses paid for a deceased  person would have had to be paid and claimed within 1 year after his death.  The fact that the county paid the provider and you paid the county probably also disqualifies the payoff as a medical expense, but I have not researched that since you are past the 1 year limit. 

sundollar2
Returning Member

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

Medicinal lien can get tax deductible?

 

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.


@sundollar2 wrote:

Medicinal lien can get tax deductible?

 


Medical expenses are deductible when you pay the provider.  If you don't pay the provider, you can't deduct the expense. 

GeorgeM777
Expert Alumni

Am I able to deduct a medical lien as a medical expense on my taxes from an insurance settlement? I also had to pay back disability pay.

The medical lien is a legal claim against a secured asset and as such it has no innate value.  However, and to follow-up on the comments from @Opus 17, in 2021, the IRS allows all taxpayers to deduct their qualified unreimbursed medical care expenses that exceed 7.5% of their adjusted gross income. You must itemize your deductions on IRS Schedule A in order to deduct your medical expenses.

 

@sundollar2

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