I need to be a bit vague and hypothetical about this one. Suppose the following:
(1) A New York State resident and his siblings have had a long- running issue with medical treatment given a now-deceased parent in a Maryland old-age home.
(2) That they have been clear that they don't want to sue, but were keeping it as an option; no suit has yet been filed.
(3) The home offers a settlement that would pay each sibling between $5,000 and $10,000.
My question: Under those circumstances, would any Federal or New York State tax be due on such a settlement? If so, how should the siblings report it? Is withholding mandatory, or can they opt out as with most types of payments?