Payments Associated with Personal Injury
Any compensatory damages on account of a physical injury or physical sickness are nontaxable.
Thus, damages taxpayers receive for emotional distress associated with a physical injury are
excluded. In contrast, punitive damages are fully taxable,
Health Care Reimbursement
Any reimbursement a taxpayer receives from a health and accident insurance policy for medical
expenses paid by the taxpayer during the current year is excluded from gross income.
The exclusion applies regardless of whether the taxpayer, her employer, or someone else purchased
the health and accident policy for the taxpayer.
Generally, long-term care insurance, which covers expenses such as the cost of care in a nursing
home, is treated the same as accident and health insurance benefits. Thus, the employee does not
recognize income when the employer pays the premiums. Also, the individual who purchases his or
her own policy can exclude the benefits from gross income.
The exclusion provisions for
are more restrictive than those for workers’
compensation payments or reimbursements from a health and accident insurance plan
insurance, sometimes called
wage replacement insurance
, pays the insured individual for wages
lost when the individual misses work due to injury or disability
If an individual purchases disability
insurance directly, the cost of the policy is not deductible, but any disability benefits are excluded
from gross income.