Receiving a settlement or award in a medical malpractice case related to nursing home wrongful death can bring financial relief, but it’s important to understand the potential tax implications. Specific tax rules apply depending on the type of damages awarded.
Determine the type of damages awarded
Settlements and awards typically fall into categories like compensatory or punitive damages. Compensatory damages for physical injuries or illnesses, including wrongful death, are usually not taxable under federal or California state law. However, punitive damages and interest earned on awards are considered taxable income.
Understand how emotional distress impacts taxes
If part of the settlement compensates for emotional distress or mental anguish, it may or may not be taxable. In California, damages related to emotional distress are generally non-taxable if directly caused by a physical injury. However, if emotional distress is unrelated to physical harm, it may be subject to taxation. Proper documentation from medical professionals can help clarify the nature of the claim.
Account for attorney’s fees
Attorney’s fees can impact the taxable amount of your settlement. In many cases, the IRS and California tax authorities require you to report the entire settlement amount as income, even if a portion went to legal fees. Discussing these implications with a tax professional can help you prepare for any tax liabilities.
Consider structured settlements
Structured settlements, which spread payments over time, may offer tax advantages. By receiving smaller amounts over a period of years, you can potentially reduce your annual taxable income. This approach may also provide long-term financial stability.
Understanding the tax implications of a medical malpractice settlement for nursing home neglect or abuse helps recipients make informed financial decisions. Reviewing settlement terms and consulting with tax professionals ensures compliance with federal and state tax laws while protecting your financial interests.