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Is settlement money taxable income?

When you receive your settlement funds from the insurance company in compensation for your injuries from, for example a car accident, is that money taxable income?  The IRS begins everything with the premise that all income is taxable, from whatever source derived, unless exempted by another section of the code.  IRC Section 61.  Logically it seems that money received to compensate for injury and pain and suffering in an effort to make the victim whole should not be taxable because the victim has not realized any form of a gain, but is simply obtaining recovery for a loss.  IRC Section 104(a)(2) supports this rationale: All amounts received on account of physical injuries are excluded from gross income.  This includes damages awarded for emotional distress attributable to physical injury.  The determining factor is whether the award is directly linked to physical injury and/or physical sickness.  Punitive damages that aim to punish and deter the defendant, for example, are not excluded by this section.  Even if you are pretty certain that a settlement award would qualify for exclusion, it is always a good idea to discuss at length the specific issues and the allocation of any particular award with a tax expert/consultant. 


Posted By Park Chenaur on June 01, 2010 01:08 pm | Permalink 
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