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.
- 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.)