Final answer:
Damages awarded for physical harm in personal injury cases are exempt from taxation, while awards for emotional harm or punitive damages are typically taxable according to IRS guidelines.
Step-by-step explanation:
In personal injury cases, the Internal Revenue Service (IRS) provides specific guidelines regarding the taxation of damages awarded to individuals. Generally, any damages that are awarded for physical harm are exempt from taxation. This is because compensation for physical injuries or physical sickness is intended to make the injured party 'whole' again after their loss, and thus, not subject to income tax. On the other hand, awards for emotional harm or punitive damages are typically taxable. The rationale behind this distinction is that emotional injuries do not leave physical evidence in the same way that physical injuries do and punitive damages are intended to punish the wrongdoer rather than compensate the victim.