OLR Research Report

November 12, 2003




By: George Coppolo, Chief Attorney

You asked whether damages in a medical malpractice case are taxable under state or federal law. Our office is not authorized to give legal opinions and this report should not be considered one.


Medical malpractice cases resulting in damages typically involve physical injury to the patients caused by what the health care provider did or failed to do. It does not appear that damages resulting from a physical injury are taxable under either state or federal law with the following two exceptions- punitive damages and interest on any damage award. Damages in a malpractice case where no physical injury is involved would be taxable except for medical care costs attributable to emotional disorders caused by the malpractice.

Although the Connecticut income tax law contains some exclusions that the federal law does not, attorney Stacey Pavano of the Department of Revenue Services advised us that with respect to damages from medical malpractice and other personal injury cases, state and federal law are the same. Thus, federal rules with regard to taxability would apply to Connecticut.


Section 61 (a) of the Internal Revenue Code (IRC) defines gross income for federal income tax purposes as “all income from whatever source derived,” except as otherwise provided. The Supreme Court has long recognized that Congress, through the enactment of section 61(a), intended to exert “the full measure of its taxing power” (Commissioner v. Schleier, 515 U. S. 323, 327 (1995); Helvering v. Clifford, 309 U. S. 331, 334 (1940)). Accordingly, any receipt of funds by a taxpayer is presumed to be gross income for tax purposes unless the taxpayer can demonstrate the accession fits into one of the exclusions created by other sections of the Code (Commissioner v. Glenshaw Glass Co. , 348 U. S. 426, 431 (1955)).

Section 104(a)(2) of the IRC permits a taxpayer to exclude from gross income any damages (other than punitive damages) received on account of personal physical injuries or physical sickness.

Attorney Mike Coyle, a tax law expert, with nearly 30 years of experience advised us that the IRS has interpreted this exclusion as covering damages from any tort case involving a physical injury. Thus, according to Coyle, as long as the malpractice involved some physical injury, the damages are excluded from income and not subject to federal or state income taxation.

Coyle cautioned that this section of the code specifies that damages separate from any physical injury are not excluded from income and are taxable. Thus, for example, damages in a malpractice case brought against a mental health professional, such as a psychiatrist, that alleged only mental and emotional damages, with no physical injury, would be taxable except for medical care attributable to emotional damages. But as long as there is a physical injury, any damages, economic, or noneconomic, physical or emotional, would be exempt from income taxation.

Coyle also stressed that this exemption from taxation does not apply to punitive damages. Thus, all punitive damages in connection with a medical malpractice case are taxable, even if the malpractice caused physical injury.

Finally, Coyle advised us that the IRS code does not exempt interest from taxation. Thus, any interest on damages whether in the form of pre- or post-judgment or settlement are taxable.

GC: ro