In January of 2012, the Internal Revenue Service amended Section 104 of the IRS Code, providing an important change in tax regulations for plaintiffs in Illinois personal injury cases.
The amendment broadens the category of income received as a result of a personal injury or physical sickness that can be excluded from gross income. The new regulation removes the requirement that damages received from a legal suit, action or settlement must be based upon "tort or tort type rights" in order to qualify as an exclusion from gross income.
The "tort type rights" test was initially intended to distinguish between damages for personal injuries and other types of damages, such as damages for breach of contract. With the new amendment, however, the exclusion from gross income may apply to damages recovered for personal physical injury or physical sickness under a statute that does not provide for a broad range of remedies. Also, the injury need not be defined as a tort under state or common law.
While the IRS Code still limits the exclusion to damages for personal physical injury or physical sickness, the regulations do permit the exclusion of damages for emotional distress to the extent the emotional distress is attributable to a physical injury or physical sickness.
The new rule helps to clarify tax obligations related to monetary damages received for physical injury or emotional distress.
Source: Sally P. Schreiber, "IRS issues final regs on exclusion of damages for personal physical injury," Journal of Accountancy, January 20, 2012
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