Q&A: How is a medical settlement taxed?

I am posting this question on behalf of a friend. Her situation is as follows:

She had surgery that cost $ 20,000. However, her doctors made a mistake on filing her insurance forms, and the insurance company refused to pay. She wound up getting a settlement from the hospital to cover the cost. No lawyers and no court was involved.

The question is, will she be taxed on this amount? If the insurance company had paid, she would not have been taxed. But since it is technically a settlement, would she have to pay? If not, what argument can she make for it if the IRS tries to collect?

SmartA$ $
The IRS won't consider this income, and therefore it will not trigger an income tax liability.

Tom Z
To be a bit more precise. According to the IRS, compensatory damages for physical injury are not taxable however if the settlement included any payments for punitive damages. emotional damages such as pain and suffering or accrued interest that part of the settlement would be taxable...

What do you think? Answer below!

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Orignal From: Q&A: How is a medical settlement taxed?