Is Your Injury Settlement Payment Taxable?

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One of the most frequently asked questions tax professionals receive is “Are injury settlement payments are taxable?” According to Code Sec. 104(a)(2), payments received as compensation for a personal physical injury or physical sickness are not taxable. The key term here is physical. Payments for emotional distress or other reasons that do not stem from a physical injury are taxable income. Likewise, a portion of punitive damages awarded are taxable income even if they are related to the physical injury. This is ultimately because the purpose of a punitive damage award is to punish the defendant rather than to …read more

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