Taxes on Personal Injury Payments
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This can be an important question for many people who get damage awards from courts or to settle litigation. Here’s the general rule: The amount of damages you receive on account of “personal physical injuries” or “physical sickness” isn’t subject to federal income tax — except to the extent that the payment is for “punitive” damages. Punitive damages, which generally are taxable, typically are payments designed to punish someone for wrongdoing. The law on this subject changed more than a decade ago. A 1996 law said “emotional distress” can’t be considered a physical injury or a physical sickness, says Mary B. Hevener, a lawyer at Baker & McKenzie in Washington, D.C. Before that law change, the rule was that income you received wasn’t taxed if it represented compensation for “personal injuries or sickness,” which included both physical and nonphysical injuries (such as emotional distress), according to a summary in a recent opinion by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit. These issues arose in a case I wrote about in my Aug. 26 column. In that case, the appeals court panel said that Marrita Murphy, who had received $70,000 from her former employer for emotional distress and loss of reputation, had to pay federal income tax on that income. Ms. Murphy has asked the full appeals court for the District of Columbia to review the decision. She is being represented by David K. Colapinto and Stephen M. Kohn in Washington, D.C Source : online.wsj.com |