Final answer:
Damages for physical personal injury are taxed differently depending on the type: loss of income is generally taxable; expenses incurred are non-taxable unless previously deducted; pain and suffering is non-taxable; and punitive damages are always taxable.
Step-by-step explanation:
Tax treatment of damages received for physical personal injury can vary based on the nature of the damages. Here's a breakdown of how each type is generally taxed:
- Loss of income: Although general rule exempts damages for physical injuries, compensation for loss of income that results from a physical injury is typically taxable since it substitutes for taxable income the individual would have otherwise earned.
- Expenses incurred: Reimbursements for medical expenses related to physical injury are not taxable provided they have not been previously deducted on a tax return. If expenses were deducted in a previous year and a reimbursement is received, it may be taxable to the extent of the deduction that provided a tax benefit.
- Pain and suffering: Compensation for physical pain and suffering stemming from a physical injury is usually not taxable, as long as it compensates for actual physical injuries or sickness.
- Punitive damages: Punitive damages are always taxable, regardless of whether they relate to a physical injury or not, as their purpose is to punish the defendant rather than compensate the plaintiff for a loss.
Compensation connected to physical injuries can often be complex when it comes to taxes, so it may be advisable to consult with a tax professional or attorney for specific cases.