Question

Jason Deruler was diagnosed with depression three years ago. Since stress increases the symptoms, he left his public accounting job to become an accountant at a manufacturing firm. His symptoms subsided substantially after his move. Then last year, the firm hired a new accounting manager, Sheila, who is very high strung and demanding. Worst yet, Jason uncovers that Sheila is double billing customers that she believes will not notice the overcharges. All of this causes Jason to suffer a recurrence of his depression and he copes with his issues by overeathing. Because of his eating habits and resulting obesity, Jason suffers insomnia, nausea, and migraines such that his doctor recommends he take a leave of absence, which he does. Shelia fires Jason and Jason sues. When the settlement payment is made for wrongful discharge, Jason receives back wages, attorney fees of $100,000; and $50,000 identified ambiguously in the lawsuit as "nonemployee compensation." Can Jason exclude the $50,000 as a payment for sickness or injury?

Answer 1

Jason's emotional distress cannot be included as part of a physical injury or sickness for the income exclusion. The section 104 under Internal Revenue Code of 1954 states emotional distress can be excluded from the physical injury or physical sickness. However when the amount is paid for medical care that attributed to emotional disturbance, then it is allowed to be excludable from gross income. The section 104(a)(2) of IRS does not consider the amount of any damages received (by agreement or suit ) on account of personal sickness or injuries in the gross income. Thus Jason is allowed not to include the $50,000 as a payment for injury or sickness.