re: Question about settlement and taxes

quote:

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The agreement in the settlement was that the funds were for emotional distress, and we were told it was not taxable.

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You were told incorrectly.

The only settlement proceeds that are excluded from personal income taxes are those for physical injuries and/or physical illness/sickness.

Emotional distress / emotional injuries are specifically and clearly NOT excluded under the US tax code.

Some states (LA is not one of them) go further and exclude a wider range of settlements from state taxation, but that doesn't affect federal taxes.

Now, because that settlement is taxable, you potentially can deduct the costs of her emotional support care, provided she is meeting with a licensed medical professional. However, medical expenses have a high threshold to meet. They should be deducted in the year paid, regardless of when the settlement occurred.

I'm very sorry you got bad advice, and I'm also very sorry for the accident and what you and your wife have gone through. I'm dealing with a new client right now that had an attorney tell her that her settlement proceeds weren't taxable, and they are, and it's causing a big issue for her. Attorneys, unless they are tax attorneys, don't know jack about the tax code.