Medical Malpractice and Taxes: What You Need to Know

Medical malpractice is the administration of medical care that digresses from the baseline, standard of care in the form of negligence by act or omission and results in injury or death to a patient. Most cases of medical malpractice encompass some type of medical error, and criterion for what malpractice is differs between countries and jurisdictions.

Because of the high rate of malpractice accusation, many medical professionals secure themselves with liability insurance to assist with or offset the lofty expenses of lawsuits that occur due to the assumption of medical malpractice.

According to statistics, over 250,000 people a year suffer fatality due to a medical error. The average hospital costs, based on such error is estimated at over $450 million.


When a person wins a medical malpractice suit, the first question they typically want answered is “Do I have to pay income taxes on the money I receive from winning my suit?” The answer is, with extremely limited exceptions, no; proceeds from a personal injury or medical action are usually not taxable.

That monies won in such a suit are not taxable brings people great relief. Being injured and then having to go through the harrowing process of bringing together a lawsuit to receive adequate compensation for your disability is by itself a painful experience. Having to pay taxes on money won after going through all of that could be devastating. Fortunately, the United States government has acknowledged the money gained from medical malpractice suits is not earned income, but reparation in exchange for the pain and suffering endured due to another’s careless conduct.

Although the settlement may not taxable, they ARE required to be reported to the Internal Revenue Service. The way it typically goes is, upon settlement of your case, you are sent a notice from the insurance company that paid your compensation with documentation pertaining to your medical care and the settlement. You or your accountant will then need to report the proceeds on your tax return – and if the monies are invested and profit is gained from those investments, that profit is taxable.

What are the exceptions? As usual, there are exceptions to every rule and this case is no different. There is a handful of circumstances under which money made from a medical malpractice settlement is taxable. One is, in the case where a patient dies, compensation for pain and suffering is typically taxable to the estate. Sometimes, there are legal loopholes in which the monies can be allocated to the wrongful death (money that is not taxable to the estate) rather than the pain and suffering element (money that is taxable to the estate).

Remember, whether or not a settlement is taxable will depend on what exactly you are receiving an award for, which is something that should be discussed with your lawyer before you agree to go through with a lawsuit. If you are paid compensation for the loss of something you had before the malpractice (for instance your vision), the IRS will not dip into your compensation fund. If you are being repaid for a loss you had already taken a tax deduction for, the award is taxable. Also, amounts awarded for punitive damages, emotional distress or mental anguish, or injury to reputation are generally not exempt from taxation.