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Hi,

My oldest son was a passenger in an auto accident. The insurance paid the initial $10,000 in medical bills and they are now offering a settlement. The settlement includes paying off the remainder of the medical bills, lost time from work and any future medical expenses related to the accident. Is the portion of the settlement above the current medical bills taxable?

Calvin
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The settlement includes paying off the remainder of the medical bills, lost time from work and any future medical expenses related to the accident. Is the portion of the settlement above the current medical bills taxable?

Yes, lost time from work is taxable. If you receive "punitive damages", that, too, would be taxable.

Donna
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Yes, lost time from work is taxable. If you receive "punitive damages", that, too, would be taxable.

Hi Donna,

Are you sure about this? I was looking at Pub. 525 today and found this on page 17 under Other Sickness and Injury Benefits:

Other compensation. Many other amounts you receive as compensation for sickness or injury are not taxable. These include the following amounts.

1. Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments.

2. Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income.

3. Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.

4. Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits.


I think 3 and 4 are applicable and maybe 1. It's the car insurance policy making the payoff and he received some permanent scarring. The settlement is the first offer made by the insurance company to settle the accident claim. No lawywers involved at this point (and probably unlikely).

Calvin
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Calvin,
If you wanted to try and take the position that any amounts you receive in settlement are excludable from income, I would suggest that you have an attorney look at the settlement papers the insurance company will ask you to sign. He or she might advise to have language in the agreement to the effect that it is agreed by the parties that the amounts paid and received are in for ... and then specify the particular categories of excludable items listed in Publication 525 for which your son is being compensated (say, 1. compensation for physical injury and sickness...$xx; 2. loss of earning capacity...$$; 3. disfigurement...$$; and so on). But you should check with your attorney as to how to proceed.
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Hi taxdoll,

He received the offer in writing and it looks like the only item reported to the IRS will be interest earned on the settlement amount. We will definitely check out what the final papers say before signing. Thanks for the suggestions on ways to have it worded.

Calvin
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