Question

Christie sued a former client for slander and defamation she suffered on the job in 2018. As a result of the injury, she was partially disabled. In 2019, she received $350,000 for her loss of future income, $190,000 in punitive damages because of the employer’s flagrant disregard for the employee’s safety, $130,000 due to emotional distress from the injury, and $17,000 for medical expenses. The medical expenses were deducted on her 2018 return, reducing her taxable income by $12,000. Compute Christie’s gross income from these transactions in 2019.

** ignore the $17,00 for medical expense

Answer 1

Provision: As a general rule, the proceeds from a personal injury settelement or jury verdict are not subject to any income taxation. However this general exclusion from taxation only applies to money received to compensate you for the expenses associated with treating your bodily injuries.

If you receive other forms of compensation through a personal injury lawsuite, those funds could be subject to taxation.

Fact of the Case: Christie suffered injury on the job in 2018. In 2019 she received following amounts as a result of lawsuite:

• $350,000 for loss of future income
• $190,000 in punitive damages
• $130,000 for imotional destress
• $17,000 for medical exps (the same claimed as deduction under 2018 return)

Conclusion:

Computation of Christie's Gross Income for 2019:

Taxable Income	Taxable Amount (in $)
Amount received for loss of future income - a financial recovery from from personal injury settelement or jury award is subject to taxation.(Payment of lost wages are generally taxable)	350,000
Amount received in Punitive damages - Punitive damages are paid by a defendant as a form of punishment when it is determined that their conduct was especially outrageous, hence taxable	190,000
From imotional distress from the injury - the money you receive via a settlement or jury award must be directly related to physical injuries, hence any emotional distress, anxiety, and other "pain and suffering" damages subject to taxation.	130,000
Medical expenses - this usually comes under the general exclusion as provided above, but since in previous year (2018), the deduction for medical expenses is claimed, it will be taxed now to the extend reduction of taxable income last year.	12,000
Total Taxable Income	682,000