In general, compensation received from your medical malpractice settlement or jury award is not taxable; however, some exceptions may apply.
Money received through your bodily injury settlement or jury verdict is typically not taxable because the settlement or jury award largely encompasses reimbursements to the patient (i.e., medical expenses, lost wages, and miscellaneous out-of-pocket expenses). An award received for emotional distress or mental anguish originating from a physical injury is also not taxable as income.
However, if proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, it is likely taxable and must be included in your income. Punitive damages are rare in medical malpractice cases; however, they are available in certain situations. If you do receive a punitive damage award as a part of jury verdict, then that portion of the award is most likely taxable as income.
We cannot stress enough the importance of speaking with a certified public accountant or a tax attorney before filing your tax returns if you have received a medical malpractice settlement or jury award within the taxable year.