Medical settlement

[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....

[jklcpa]

If the $5702 in direct medical expenses were deducted in a prior year and provided a tax benefit, those are taxable if the deduction produce a tax benefit, or if in 2013 then they would reduce the current deduction since she was reimbursed for them. The part of the settlement for her emotional and physical distress might be taxable too, unless you can tie that back to a physical illness or injury, so it seems the settlement would have to be because failed tubal ligation is a physical injury or physical illness. I don't think you can exclude the portion of the payment that relates to the future medical expenses because she hasn't incurred those expenses yet.

IRS pub on settlements: http://www.irs.gov/pub/irs-pdf/p4345.pdf

[joanmcq]

The tubal isn't, but what about the pregnancy?

[jklcpa]

What was actually referenced in the settlement for the portion that relates the emotional and physical distress?

I was trying to find something about the future medical expenses for you. I came up with a case of someone named Niles in Rev Ruling 79-427 where the future medical expenses weren't allowed as a deduction because the tax court said it would be excluding them more than once (implied that they were taxed when the settlement occurred).

I am frustrated with the results of the searches in my research materials, must not have correct key works to get to the answer, but I found these on the internet that have references to some Rev Rulings that you could look into.

http://www.lanepowell.com/wp-content/uploads/2012/07/Babener_Article_MedExpenseDed-Master-2012-v-6.pdf

http://openjurist.org/710/f2d/1391/niles-niles-v-united-states

[joanmcq]

Do you mean implied they were not taxed at settlement?

[Abby Normal]

This is a pretty good overview:

http://www.meehanboyle.com/taxation-of-judgments-and-settlements/

I would exclude some of it under the physical sickness provision. It's a shame that some was for emotional distress because Congress doesn't view that as a "real" injury. Bastards.

[Abby Normal]

One question that is an ongoing debate is whether you can net or deduct the legal fees. I think the court cases have been split on this.

[Lee B]

There have been conflicting Circuit Court decisons on the legal fees, so it's going to depend on which Circuit your taxpayer lives in.

[joanmcq]

9th circuit.

I guess some of it turns on whether pregnancy or to be exact, unwanted pregnancy is a medical injury or not.