Legal Question in Tax Law in California

Re: Is compensation from personal injury from insurance company taxable?

Thanks for your posting, and apologies for the length of time it took for you to get a response.

Section 104(a)(2) of the IRC states that compensation received on account of personal injury or sickness is exempt from gross income whether received in a lump sum or in periodic payments. The reason most often cited as justification for this exemption is that the claimants are merely being compensated monetarily for what they have lost physically or otherwise, and the payments are not a gain for the claimant. If the claimant invests these payments, the interest earned will be taxed.

Otherwise, all income, "from whatever source derived," is taxable, pursuant to Internal Revenue Code �61, unless the Code specifically provides an exclusion. Prior to 1996, individuals interpreted the exclusions very broadly when classifying lawsuit awards.

In 1996, Congress amended IRC �104(a)(2), which excludes certain settlements from taxation, in an attempt to resolve the issues surrounding the exclusion of awards, particularly for damages related to "personal injury." The Code now explicitly states that punitive damages are not excludable from income. The amendment also limits damage exclusions to those awarded for "personal physical injury or physical sickness."

I hope this helps, and please feel free to contact me if you feel you need legal assistance at 1-877-568-2977 (toll free) or via email.