The Internal Revenue Code generally provides that all income, from whatever sourcce derived, is subjet to federal income taxes. But, the Code also defines certain types of income as being excluded from taxes, and provides numerous deductions and credits to reduce the amount of the income or tax. Specifically, Internal Revenue Code 104(a)(2) provides that gross income does NOT include “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sumps or as periodic payments) on account of catastrophic physical injuries or physical sickness.” What this means is that a catastrophic injury settlement for physical injury is not generally subject to taxes because the settlements are not considered gross income. The money awarded is for a person’s injuries, medical bills or property damage, and this is considered compensation for a loss. But, if a portion of an award is for punitive damages, this portion is taxable. Also, if a portion of the settlement is for non-physical injury (mental anguish, emotional distress), then the analysis is a bit more complicated – especially if the non-physical injury is the result of a physical injury.
If you have any questions regarding a catastrophic injury case, do not hesitate to reach out to the experienced attorneys at Mag Mile Law by calling (708) 576-1624 or emailing us at in**@********aw.com.