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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13143
Experience:  15years with H & R Block. Divisional leader, Instructor
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On the Lona Buck v. Allstate (American Heritage Life Insurance

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On the Lona Buck v. Allstate (American Heritage Life Insurance Co.) I was issued $6,000 class action future op out of the cancer policy. I took the $6,000. Now I have a 1099 with the $6,000 called income.

My tax person quesstions if I have to pay tax on the 'income'. Please advise.

Ron A

Robin D :

Hello and thank you for using Just Answer,

Lawsuits against insurance companies, finance companies, etc., for negligence, fraud, breach of contract, etc., can include a variety of claims, and therefore can produce a variety of types of awards/settlements.

Because these are nonphysical injuries, under IRC § 104(a)(2), only compensation for out-of-pocket amounts for medical costs incurred to treat any emotional distress claims would be excludable from income if not previously deducted (IRC §§ 111 and 213). All punitive damages received pursuant to these types of claims are taxable.
Your tax preparer would want to look to the reason for the lawsuit and then if you paid any medical costs due to mental distress. Only the medical could be excluded unless you used that amount already as a deduction on your Schedule A.


Robin D :

It is unfortunate but lawsuits and awards are sometimes taxable.

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