PTSD allegations often arise in personal injury cases. The question is: are damages awarded because of PTSD tax-free?
Tax attorney Robert W. Wood recently wrote about the subtleties that come into play when the IRS is determining whether PTSD damages are excluded from taxation. He noted that physical injuries or sickness are excluded under IRS Code Section 104, but emotional distress is generally taxable.
With PTSD now being thought of as a physical injury instead of an emotional injury, its tax-free status would appear clear. Yet, a recent case involving PTSD damages found that a case’s litigation description and its legal framing were more important than whether PTSD was a physical or emotional injury (Estate of Roman J. Finnegan, Deceased, Kevin C. Tankersley, Personal Representative, and Lynnette Finnegan, et al. v. Commissioner of Internal Revenue). In this case, the Tax Court found the PTSD damages were, in fact, taxable.
The bottom line: if PTSD is part of your damages, make sure the documentation presented to the court and agreement wording are in line with IRS tax exclusion requirements.
To read Robert’s very thorough analysis, go to https://www.woodllp.com/Publications/Articles/TaxAlert/Lawsuit_Settlement_Payment_Was.pdf.
Please contact me with any questions.
Pat Farber
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