I agree with my collegues, but because Ohio recognizes the causes of action of negligent and intentional infliction of emotional distress, I would add some additional guidance. Section 104(a)(2) excludes from gross income “the amount of any damages (other than punitive damages) 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 term “damages received” means an amount received “through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution.” Sec. 1.104-1(c), Income Tax Regs. This is where previous answers have stopped. But the flush language of section 104(a) further provides that “emotional distress shall not be treated as a physical injury or physical sickness” for purposes of section 104(a)(2). "[T]he term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress.” 5 H. Conf. Rept. 104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041. In the event that your settlment included damages for emotional distress, I would contact an experienced tax attorney to discuss.
Just as a QND (quick and dirty) formula to determine whether your settlement damages are taxable, I always use this test: first, the underlying cause of action giving rise to your recovery of the payment is based upon tort or tort type rights, and second, the payment was received on account of personal physical injuries or physical sickness. See Commissioner v. Schleier, 515 U.S. 323, 328 (1995); see also sec. 104(a)(2); sec. 1.104-1(c), Income Tax Regs.
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Generally not, unless part of the settlement was for lost wages. Check out the IRS website and you will be able to find an answer. Insurance proceeds generally are not subject to income tax.
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I'm not admitted in OH (only in CA) but I can offer these general observations. Typically, unless the settlement specifically provides that it (or any part of it) is for compensation for lost wages, personal injury settlements are generally not taxable. The idea is that the money paid to you is to try to make you whole, so you're not really getting "compensated" in an income sense. I would discuss the matter with a tax consultant and/or a tax attorney in your area if you have any questions or reservations about this issue.
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It can get a little confusing but generally a settlement for physical injuries or illness is not taxable as income. However, if a portion of the settlement proceeds is designated in a settlement agreement as specifically for emotional injury damages or lost wages or even a confidentiality provision, then those non-physical injury or illness components are taxable as income. In general, if you just received a simple settlement check from the insurance company in exchange for a General Release, then the whole amount is likely non-taxable.
Here is a disclaimer - while I am a personal injury attorney, I am not a tax expert. This is only my understanding of the law, and is not intended to be legal advice. Check the IRS guidelines yourself on taxability of settlement proceeds or check with your tax professional.
Generally speaking, a personal injury settlement is not taxable. I would suggest you run the question by your tax adviser though in case your situation had some unusual aspect. Good luck to you.
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