About Taxation Of Damages
Section 104(a) of the Internal Revenue Code excludes from gross income the amount of any damages, other than punitive damages, received as a result of personal physical injuries. The government does not tax a physical injury recovery because it is designed to make you whole again after the injury. The same holds true for amounts received on account of physical injuries suffered on the job (workers’ compensation claims). Section 104(a) provides in relevant part: (a) In general Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include – (1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness; (2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness; (3) amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer) . . . .