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Asked by KCandora - 6 years ago
I received a large settlement from a medically related class action lawsuit and I want to know if this is considered taxable income
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Richard Level 79 / Retired Dentist
Answered 6 years ago
Getting a monetary settlement from an insurance company as a result of a class action lawsuit isn't necessarily pennies from heaven. The money carries tax consequences that you'll need to address when you prepare your annual income tax return.
If you have any questions on how to treat your particular settlement proceeds, it's best to ask your tax consultant or accountant. But here are some general guidelines on what to do when it's time for your annual report to Uncle Sam.

Ordinarily, any income you receive is taxable. (In the insurance world, an exception to this is the proceeds of a life insurance policy to which you're a beneficiary.)

If you receive insurance lawsuit settlement money, you'll need an Internal Revenue Service (IRS) Form 1099 that shows the amount of money you received and from whom. There are several types of 1099 forms that report on earned gross income (money from which taxes have not been deducted).

If you read them carefully, you can usually tell.

If you were paid for actual damages for an injury that you received, the amount is not taxable.

"Inconvenience" payments and payments for pain and suffering are taxable
Generally you do not have to pay taxes on a settlement unless a portion of your settlement was specifically designated as compensation for lost wages.
In New York and Pennsylvania, compensation for your injuries and pain and suffering is tax free.
kc5255 Level 38 / Out of the Workforce
Answered 6 years ago
Q: Is the money received from a settlement taxable?

A: To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item which the settlement replaces. Include the following as ordinary income:
Interest on any award
Compensation for lost wages or lost profits in most cases
Punitive damages. (But see below)
Amounts received in settlement of pension rights (if you did not contribute to the plan)
Damages for
Patent or copyright infringement
Breach of contract
Interference with business operations
Any recovery under the Age Discrimination in Employment Act
Damages to your character
Alienation of affection
Don't include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Damages for emotional distress due to a physical injury or sickness aren't taxable.

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