by Structured Settlement Watchdog
made the following claim on January 7, 2025:"Some components involved in personal injury cases, including lost income, are taxable. The IRS considers lost income taxable, as it replaces wages subject to income tax. Similarly, punitive damages and settlement interest fall under taxable income".
What the IRS actually says regarding Damages for Lost Income in a Personal Physical Injury Case?
Prior to August 21, 1996, IRC Section 104(a)(2) did not contain the word "physical" with regard to personal injuries or sickness. The Code was amended (SBJPA, PL 104-188) to exclude from gross income "the amount of any damages (other than punitive) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness".
The Service has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income with the exception of punitive damages. Rev. Rul. 85-97 and also see Commissioner v. Schleier, 515 U.S. 323, 329-30 (1995). Source: Tax implications of settlements and judgments | Internal Revenue Service Analysis section #3.