Income tax and withholding on damage payments
Article Abstract:
The Small Business Job Protection Act of 1996 includes revisions of Sec 104(a)(2). The amendments indicate that gross income should exclude damages received for personal physical injuries or sickness. On the other hand, gross income should not exclude damages received for nonphysical injury or sickness, including injury to reputation and age discrimination. Damages for emotional stress should not be treated as damages for personal injury or sickness unless the amount paid is for medical care on account of emotional distress. As for punitive damages, the 1996 act holds that they should be included in the gross income of the recipient without consideration of whether they are paid for physical injury or physical sickness. Finally, payments for emotional distress and attorney's fees should not be treated as wages covered by withholding, FICA and FUTA taxation, unlike payments for back pay, which are considered wages.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1997
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Punitive damages for personal injury are excludable
Article Abstract:
The Tax court has issued two key rulings on the treatment of damages received after the resolution of a personal injury suit. In 'Horton,' the court ruled against the IRS, which had argued that only compensatory damages could be excluded from income, while punitive damages could not. Interpreting Section 104(a), the court concluded that Congress had intended that all damages emanating from a personal injury claim be excludable and that any attempt to distinguish between compensatory and punitive damages was invalid. In 'Kovacs,' on the other hand, the court concurred with the IRS, affirming its assertion that statutory interest added to the damages received under an injury claim were not excludable.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1993
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