Medical deduction or not

[mactoolsix]

In 2012 our client was injured and had large medical bills. After months of haggling, it didn't look like the insurance company was going to pay up, so the client paid the medical bills himself and sued the responsible party.

Several months later (still in 2012) the insurance company pays up and reimburses the injured party (our client) for all the medical bills, thus we took no medical deduction for 2012.

In 2013 the client won the law suit - personal injury, non-taxable - for more than the medical bills. He paid back the insurance company, however after paying the legal fees he came out only a few bucks to the good.

So, since he actually paid his own medical bills, can he claim the medical deduction for 2013?

We are looking for a court case to substantiate the claim.

Any help greatly appreciated!!
Thanks,

Mike

[Koss]

Lawsuit

He can't deduct medical expenses if someone else reimbursed him. It doesn't matter whether the reimbursement came from the insurance company, or from the person who caused the injury, or from someone else, such as the employer of the person who caused the injury.

One interpretation of the facts you have described is that the person who injured your client reimbursed him for the medical bills. That person did so only after a court ordered him to do so, but it still appears to be a reimbursement.

It that's what happened, then your client didn't actually pay the medical bills. In other words, he's not "out of pocket." The payment he received as a result of winning the lawsuit "made him whole," and he has no deductible medical expense. In fact, as you noted, he came out ahead, because the award from the lawsuit was more than his medical expenses.

The only way your client might have a medical expense deduction is if the entire amount of money he received from the lawsuit was exclusively for pain and suffering, and not to compensate him for the medical expenses incurred as a result of the injury.

I can't give you case law you are looking for. The question here is very fact-specific. The answer lies in the documents from the lawsuit.

You said he won the lawsuit.

Are you sure?

I'm not trying to be a jerk. In most jurisdictions, 98% of all lawsuits that are filed are resolved with an out-of-court settlement.

To an unsophisticated client, "winning the lawsuit" simply means that he got a bunch of money.

If you haven't already done so, you need to ask your client: Was there a trial? Is there a judgment entry that was signed by a judge? Or is there a settlement agreement that was signed by the parties to the lawsuit?

Either way, you need to see it. Because that document will tell you what the money was for, and how the amount was determined.

If your client's medical expenses were used to calculate the amount of money he got in the lawsuit, then he has been reimbursed, and he can't take a deduction.

The language of the settlement agreement, or, if he really won the case, the judgment entry, controls everything here.

BMK

[Gretel]

If there are no court papers, the attorney is the one to determine how much of the funds is for pain and suffering. I got this from my attorney in writing after everything was settled after my accident (no lawsuit, just insurance proceeds).

[mactoolsix]

Koss,

As always your replies are enlightening.

Yes, he received a judgment - we have a copy, which I just gave a cursory view yesterday - I'll do a close read on it tomorrow.

If the insurance company never stepped up and reimbursed our client, he could have taken the deduction.
He would have received the judgement money and then would have to claim the medical deduction as income to the extent of the benefit (reimbursed in a later year).

The difference is, since the insurance company got in the middle, we may need to say the medical expenses are not deductible - however as you explained, if reimbursed by the judgement for medical expenses, he still cannot claim the medical judgement.

Guess, as you say the answer will be in the judgement.

Thanks again,
Mike