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Feb 02

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IRS issues final regulations on taxation of personal injury damages

In late January, the IRS issued final regulations regarding the taxation of personal injury litigation damages. The regulations provide guidance regarding tax law changes included in the Small Business Job Protection Act passed in 1996.

Specifically:

  1. Litigation settlements are excluded from gross income for damages received on account of physical injuries or sickness.
  2. Damages from emotional distress should not be treated as a physical injury or sickness (and hence are taxable), except that damages paid for medical care attributable to emotional distress are excludible.

The final regulations are substantially the same as what was initially proposed, except for the elimination of the requirement that damages no longer need be based on “tort or tort type rights” in order to be excludible.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/02/irs-issues-final-regulations-on-taxation-of-personal-injury-damages/

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