Medical negligence settlement-cross posted

[joanmcq]

I've read the settlement docs but am still unsure on this one.

Client had a child with birth defects and had a tubal ligation to ensure she wouldn't get pregnant again. Doctors assured her the tubal was successful. About 6 months later she was pregnant with another child who had the same birth defects. She sued and was awarded quite a bit of money, but most of it is in trust for the child that was born, for future medical expenses. That much good.

She was personally awarded $89,898, $33,299 went to the attorneys, $5702 for direct medical expenses already incurred and the client received $50,897. No 1099 was issued by the attorneys. The settlement was awarded for future medical expenses, plus emotional & physical distress.

I know the direct medical expenses are not taxable. The rest???? any thoughts here? The client is an EIC candidate if this is not taxable too, so I need to be very careful. And this is for the extension....

[Burke]

If any or all of it was compensatory damages, it is not taxable. If any part of it was punitive damages, that part is taxable. And the medical expense part MAY be taxable, if they had deducted those expenses on a tax return in the past. Also, if any part of the settlement was for future medical expenses, those expenses, when incurred, must be reduced (for tax purposes) by the portion attributable to the amount allocated for them in the settlement papers. Attorneys' fees may be deductible to the extent any of this is taxable income. Generally, if punitive damages are awarded, the reporting authority must give the recipient Form 1099MISC with the amount shown in Box 3. Sounds like compensatory damages to me.