Today TaxMama hears from Seth in the TaxQuips Forum who is recovering. “I had an accident where I sustained multiple fractures (pelvis, ribs, and wrist).  My medical insurance will pay 80% of my bills, which is great.  In addition, I have personal accident insurance.  There is a dollar amount associated with each type of fracture and length of hospital stay.  Therefore, the personal accident insurance company will send me a check.  Do I need to count the personal accident insurance check as income on my taxes?”

Hi Seth, 

Wow, that IS physical damage, isn’t it? I do hope you’re healing well.

No, there are no taxes on insurance or lawsuit settlements for physical harm. However, if the policy is design to cover medical EXPENSES, then you must pick up, as income, the amount over the total of medical expenses that you paid out of pocket.

And if you took a deduction for medical expenses on your tax return, you must reduce your out of pocket medical expenses by the deductions you took.

For instance, let’s say your 20% out of pocket was $20,000 in 2010. Let’s say, in 2010, you were able to deduct on Schedule A  (after reducing it by 7.5% of your AGI), $17,375 of the $20,000. That means you never deducted $2,625. You can reduce your insurance income by that amount in 2011. Of course, if you got the insurance money in the same year you paid the bills, you could reduce it the full $20,000.  

Read the terms of the policy carefully.  If it is simply designed to pay for the pain and suffering, rather than for medical BILLS, the money is not taxable at all.

 And remember, you can find answers to all kinds of questions about insurance settlements, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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