Are Damages or Punitive Damages Taxable?Posted on August 15, 2011 in Articles
The quick answer is damages or awards received for physical injuries or sickness are generally not taxable. However, punitive damages or awards are generally taxable if they are paid to compensate a taxpayer for non-personal injuries. Internal Revenue Code (IRC) Section 104 is the area of law that defines the taxable treatment of compensation for injuries or sickness. In general if a taxpayer received an award or damages for a personal injury or sickness, then the income can be excluded from taxable income. If a taxpayer received punitive damages for non-personal injury or a non-sickness then it is typically going to be treated as taxable income. I say typically, because tax law allows damages received for nonphysical injury or sickness to be reduced for any medical expenses which meet the IRC definition of 213. Or the attorneys might craft the settlement to be worded as a physical damage.
There are many court cases regarding these issues. One to look at for damages received for non-physical damages is O’Gilvie, Kelly v. U.S. (1996, S Ct) 78 AFTR 2d 96-7454.
IRC section 104 states, the gross income doesn’t include: amounts received under workmen’s compensationfor personal injuries or sickness; amount received through accident or healthinsurance for personal injuries or sickness; amounts received as a pension, annuity or similarallowance for personal injuries or sickness resulting from activeservice in the armed forces of any country or in the Coast and Geodetic Surveyor the Public Health Service, or as a disability annuity payable under theprovision of section 808 of the Foreign Service Act of 1980; and amount received by an individual as disab9ilityincome attributable to injuries incurred as a direct result of aterrorist or military action.
Now let’s look at some