A friend I’ll call Sam is in a situation that is new to me. He was in a car accident some time ago and has been trying to claim medical costs from an insurance company. The insurance company ignored him for a long time and recently offered a settlement that would close the matter. The problem is that the settlement appears to be taxable.
Sam has already paid $1200 so far in medical costs. The insurance company has offered to pay $1500 to settle the matter, leaving Sam to pay any remaining medical costs on his own. Sam is inclined to accept the offer rather than fight any longer, but the settlement documentation claims that the $1500 would be taxable to Sam. At a 46% income tax rate, Sam would only get to keep $810 of the settlement which is less than the $1200 he has already paid.
My first thought was to go back to the insurance company and ask them to cover his expenses so far ($1200) and pay an additional $300 lump sum to settle all other costs including any future costs. The hope here is that Sam would then only have to pay income taxes on $300 instead of $1200.
Are there any readers out there who are knowledgeable on these matters who would care to comment? Perhaps the Blunt Bean Counter has an opinion?