Members of the Maryland Association of Certified Public...

Tax answers

April 01, 1996

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.

Q: If I received a lump sum of money from an accident case, do I have to claim that as taxable income?

A: First it is necessary to explain some of the different tax treatments based on the nature of an award. If the award is for medical expense reimbursement, then the amount is only taxable to the extent that the reimbursement exceeds the nonrecovered medical cost. If the award is for lost wages, or was determined by reference to lost wages, then the amount is excludable only if the accident caused an injury that caused loss of income. Compensatory damage awards resulting from traditional tort injuries, such as mental anguish, pain and suffering, etc., are excludable. Punitive damages are taxable.

Thus, whether or not the award received in your accident case is includable as income on your tax return depends what it was for. All income is includable unless it is specifically excluded in the tax law. Compensatory damage awards resulting from traditional tort or tort-like injuries, such as personal injuries, mental anguish, and pain and suffering are excludable. If you had previously deducted any medical expenses, then any award to reimburse you would be includable in income. Punitive damages are included in income because they are not in the nature of compensating the victim for some economic damage but are to punish the defendant for his or her actions.

Given the complexity and perhaps significance of this award to your return, you should consider contacting your tax adviser to ,, discuss your specific facts and circumstances.

The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.

Members of the Maryland Association of Certified Public Accountants will answer selected tax questions from readers until April 15. To ask a tax question, call Sundial, The Sun's telephone information service, at (410) 783-1800. Using a touch-tone phone, enter 6225 after you hear the greeting. Please leave your name and phone number in case a question needs clarification; names and numbers will not be published. No questions will be answered by phone.

Pub Date: 4/01/96

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