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Is malpractice settlement taxable?

Dear Tax Talk,
If someone gets a settlement from a malpractice lawsuit because their parent died, does this have to be claimed as income when doing taxes?
-- Angel

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Dear Angel,
Amounts other than punitive damages received on account of personal injury or wrongful death are income tax-free to the recipient, including that person's estate or heirs. Wrongful death settlements or awards are also not included in the decedent's estate for estate-tax purposes. Publication 4345 provides the following guidance on additional portions of awards and settlements:

Interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable.

  • Interest: Amounts on any settlement are taxable as "Interest Income" and should be reported on line 8a of Form 1040.
  • Punitive Damages: Amounts are taxable and should be reported as "Other Income" on line 21 of Form 1040. It does not matter if punitive damages are related to a physical injury or physical sickness.
  • Emotional distress or mental anguish: Amounts are taxable to the extent that it exceeds medical costs, not previously deducted, for treatment of emotional distress or mental anguish. A statement showing the entire settlement amount less related medical cost should be attached to the return. The net taxable amount should be reported as "Other Income" on line 21 of Form 1040.
Bankrate.com's corrections policy -- Posted: Dec. 20, 2005
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