Statutory Guidelines [Appendix A(1) IRC 104] regarding compensation for injuries or sickness under workmen's compensation acts, damages (other than punitive damages), accident or health insurance, etc. as stated in the guidelines.
Compensation for Injuries or Sickness IRS Code 104
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FAQ
If you receive a settlement, the IRS requires the paying party to send you a Form 1099-MISC. Box 3 of Form 1099-MISC will show other income in this case, money received from a legal settlement. Generally, all taxable damages are required to be reported in Box 3.
Settlement money and damages collected from a lawsuit are considered income, which means the IRS will generally tax that money, although personal injury settlements are an exception (most notably: car accident settlement and slip and fall settlements are nontaxable).
If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable.The tax benefit amount should be reported as Other Income on line 21 of Form 1040, Schedule 1.
As a taxpayer, any monetary award you receive is assumed to be gross income and is taxable. Fortunately, the Internal Revenue Code (IRC) permits a taxpayer to avoid paying taxes on any settlement money aside from punitive damages received due to personal physical injuries or physical sickness.
Pain and suffering, along with emotional distress directly caused by a physical injury or ailment from an accident, are not taxable in a California settlement for personal injuries.
Section 104 does not limit the exclusion to personal physical injury. It also allows for any type of any nonphysical injury inflicted.
Report taxable settlement amounts on Line 6 of Form 1040 after completing Schedule 1 (1040).
Pain and suffering, along with emotional distress directly caused by a physical injury or ailment from an accident, are not taxable in a California settlement for personal injuries.
As opposed to claims originating from a physical injury, settlement recoveries for emotional distress claims usually are taxed. This rule also highlights the difference between a plaintiff showing physical signs of emotional distress (such as headaches, insomnia, and nausea) and physical injuries or sickness.