Internal Revenue Code, Section 104 Compensation for Injuries and Sickness

This section of the Code allows claimants to exclude from their gross income monies received for physical injuries or sickness whether by suit or agreement and whether as lump sums or as periodic payments. The Periodic Payment Settlement Act of 1982 amended this section to allow the recipient to exclude from gross income all of the payments from a suit or agreement, whether paid all at once or in the future. The Small Business Job Protection Act of 1996 inserted the word “physical” into IRC § 104(a)(2) in describing injury or sickness, and removed punitive damages from the exclusion. The text of IRC § 104 is excerpted as follows:

(a) In General: Except in the case of amounts attributable (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for prior taxable year, gross income does not include:

(a)(1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;

(a)(2) 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…For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness. The preceding sentence shall not apply to an amount of damages not in excess of the amount paid for medical care (described in subparagraph (A) or (B) of section 213(d)(1)) attributable to emotional distress.

NOTE: Tax laws and rulings are subject to change at any time.

By Richard B. Risk, Jr., Esq., and reprinted with expressed permission.