The answer is that they are not taxable and are excluded from a person's gross income. The IRS excludes from gross income all funds received as compensation for damages when a person has suffered an injury or illness. Compensation for physical injuries and medical conditions is tax-free. When a person experiences pain, suffering, and emotional distress from physical injury or illness caused by another party's negligence, that compensation is tax-free.
As long as your pain and suffering is the result of a physical injury, then it is compensatory and you will not be charged taxes. Pecuniary damages are specific damages that can be added together, such as the grand total of your medical bills so far, or even the expected total of your future medical bills. Pain and suffering are considered non-pecuniary losses because they are more abstract. Even though a personal injury claim places a value on pain and suffering, it cannot be calculated objectively.
The IRS allows settlements won in a personal injury case to be excluded from gross income when filing taxes. This tax-free status applies to both lump sum and periodic payments. This means that even if your personal injury agreement includes compensation for pain and suffering, the entire agreement will not be taxable. The court can compensate families for the loss of financial support, the pain and suffering suffered by the victim before death, medical and funeral expenses, and the loss of a future inheritance.
Courts rarely award punitive damages and, as a result, most judgments do not include punitive damages. Pain and Suffering: The IRS code can be confusing with regard to the settlement's income classification. For the most part, the IRS considers all other agreements and judgments that include compensation for loss of profits taxable. The primary focus of a wrongful death lawsuit is restitution or monetary compensation for the financial and emotional loss suffered as a result of the death of your loved one.
However, there are some agreements where this is not the case, including personal injury and wrongful death settlements, which are considered exempt from income taxes. If so, and the defendant includes additional money solely to obtain a confidentiality agreement, the IRS will tax the additional compensation for this agreement. When faced with the decision to file a personal injury lawsuit, you might think that the idea of receiving compensation for everything you have lost and suffered is too good to be true. In the eyes of the IRS, a personal injury victim has suffered a loss equal to his compensated gain (the “damages”).
According to the New York State Bar Association, the court can also award the victim compensation for the consequences of a crime, including lost wages, property damage, and medical expenses. In addition, since courts must award punitive damages, only a court verdict will include them, not a settlement agreement. The IRS also includes other categories of non-taxable money that individuals can receive, such as payments for injuries in a terrorist attack, death benefits for the family of a law enforcement officer who died in the line of duty, or pension or disability payments paid to anyone who was injured in active duty in the armed forces forces of any country. Non-economic damages, including pain and suffering, are awarded to compensate for injury-related damages that are more difficult to assign a value to.