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Can Malpractice Settlements Be Taxable?


In a new court case, Blum, CA-9. No. 21-71113, 3/8/22, a taxpayer owed tax on a malpractice settlement even though the claim stemmed from a physical injury she suffered in a hospital setting.

Jun 21st 2022
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Is a settlement of a malpractice claim against physicians or a hospital considered to be taxable income

In short, it depends, but according to a recent Tax Court and Ninth Circuit Appeals Court case, it can be. Let's dig in...

Background: Generally, legal awards and settlements are subject to federal income tax, like most other forms of income. However a special section of the tax law specifically excludes from tax damages that are received on account of personal physical injuries or illness.


This issue is often contested in the courts when a taxpayer receives a settlement or other damages based on a claim of emotional distress. The new case at hand involves a settlement of a malpractice lawsuit. In this instance, the taxpayer was hurt when she sat in a broken wheelchair at a hospital.

She sued the hospital and lost, but then claimed malpractice by her attorneys and eventually agreed to a settlement. The Tax Court determined that the payment constituted taxable income.

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