Lawsuit and Medical Costs

[Patrick Michael]

Client sued a previous employer for unlawful termination and intentional infliction of emotional distress.  After three years, case was settled and client received back pay and damages for emotional distress.  From my research I found the entire settlement is taxable and he can deduct his medical expenses (prescriptions, co-pays, and counseling), incurred due to the stress, from the settlement amount.  Client wants to include the medical expenses his wife and child incurred due to the stress they suffered as a result of his being fired.  My gut tells me their expenses are not deductible since they were not a party on the lawsuit but I can't find any support either way.

What say you?

As always, thanks for sharing your collective wisdom.

[Max W]

Unless the spouse and child were included in the lawsuit, they expenses can't be deducted from the settlement, but they can still be taken on 

SCH A as long as the expenses were incurred by a licensed medical professional, and not paid by insurance.

[DANRVAN]

8 hours ago, Patrick Michael said:

From my research I found the entire settlement is taxable and he can deduct his medical expenses (prescriptions, co-pays, and counseling), incurred due to the stress, from the settlement amount

Are you saying the amounts related to medical expenses resulting from emotion distress are excluded from the taxable settlement?

That doesn't sound right to me. I believe the Emotional Distress must result from physical injury or physical sickness to meet the exclusion, not the other way around.

Sounds like in this case emotional distress was caused by mental harassment from employer.

If instead, the client got physically sick form chemicals used on the job, and the sickness led to emotional distress, the amount related to emotional distress would be excluded.

[DANRVAN]

Maybe I jumped in to soon.

Damages specifically for medical expenses related to emotional distress should be excluded.

[Patrick Michael]

On 1/27/2023 at 1:12 PM, Max W said:

Unless the spouse and child were included in the lawsuit, they expenses can't be deducted from the settlement, but they can still be taken on 

SCH A as long as the expenses were incurred by a licensed medical professional, and not paid by insurance.

Thanks for the  confirmation! 

[DANRVAN]

55 minutes ago, Patrick Michael said:

Thanks for the  confirmation! 

I have not seen any authoritative cite to confirm that.

Reg 1.104-1 (c) states: “Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress”.

As referred to, sect 213 allows a deduction for medical expenses paid by the taxpayer for his family.

Where does it say affected members of his family must be included in the suit?