Exclusions from Gross Income: Damages/Settlements

Question 1

What Did the Damages Replace?

Answer 1

Lost profits = gross income
Property = treated as sale of property
Repairing property = nontaxable up to property’s basis
Punitive Damages = always taxable

Question 2

Exceptions

Answer 2

Tort damages on physical injuries ARE EXCLUDABLE, even though they include lost earnings.

Reimbursement for emotional distress

If Physical injury is present, All Damages for emotional distress arising out of the injury are excludable.