Personal Injury Damages Overview
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Nontaxable (by suit or agreement)
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Physical Injury
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Physical Illness
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Wrongful Incarcertion
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Taxable (examples)
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Emotional Distress
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Employment Discrimination
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Sexual Harrassment
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Punitive Damages - always taxable
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Business Damages (examples)
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Related to Employment - taxable as oridinary income
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Injury to Capital - reduce basis - excess taxable
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Lost Profits - ordinary income
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Legal Expense
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Nontaxable Income = nondeductible expenses
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Taxable Income
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If related to business entity - on the entity
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If related to personal - a Schedule A Tier 2 suspended for years 2018 through 2025. Thus, for those years no federal deduction is allowed.
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If related to capital - add to basis
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Exceptions -
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Related IRC and IRS Publications and Forms
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Pub 525 - Taxable and Non-Taxable Income
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Pub 529 - Miscellaneous Deductions
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Pub 957 - Reporting Back Pay and Special Wage Payments
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IRC Sec 104
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IRC Sec 139F
California Differences
California conforms to federal law except for (1) elimination of the Tier 2 miscellaneous itemized deductions (for legal expenses related to taxable damage awards) and (2) the denial of a business deduction for sexual harassment settlements and related legal expenses.
About claims for amounts previously included in income by wrongfully incarcerated individuals, if the normal CA statute of limitations has expired for the year the income was included, an amended return to claim a refund for CA income taxes paid on that income could have been filed if submitted before January 1, 2019. (AB 454; FTB Tax News 2/1/18)