The Internal Revenue Service has shed some light on the taxability of tort damages. Attorneys typically have the kneejerk response that 
personal injury damages are not taxable. That is only true to a point.
The new regulation clarifies a few things, namely:
- Damages for personal injury or sickness are not taxable
- Damages for “emotional distress” are taxable unless they are attributable to a physical injury or sickness
- Punitive damages are taxable
The emotional distress language is important for people who handle employment law cases, false arrest, or other torts where emotional distress is recoverable but don’t typically involve physical injury or sickness.
(Howard Zimmerle is a trial lawyer from Illinois. He practices throughout western Illinois and Eastern Iowa. He can be reached at 309-794-1660 or at hzimmerle [at] mjwlaw.com.)
The I.R.S. should do a better job of making this clear to people who have won civil lawsuits. Many people get their money later than expected and sometimes forget to pay the taxes. It’s almost like the lottery in the sense that people who come into a large amount of money always forget the tax bill or assume that it’s covered when its not. That should be one of the first conversations people have after the reward money is doled out.