Question

Alice sustained a serious injury in the course of her employment in 2017. Alice took itemized deductions for her 2017 tax return which included $10,000 of medical expenses related to this injury. During 2018, Alice received the following payments in relation to her injuries:

Workers Compensation $12,000

Punitive damages from lawsuit $60,000

Compensatory damages from lawsuit as follows:

Reimbursement for medical expenses paid in 2017 $15,000

Damages for physical personal injuries $25,000

Calculate the amount that Alice must include in her 2018 Gross Income

Answer 1

Calculation of Gross Income of Alice for year 2018 :- Amount($)

Workers Compensation (working Note 1) = 0

Punitive damages from lawsuit (Working Note 2) = 60000

Reimbursement for medical expenses (Working Note 3) = 10,000

Damages for physical personal injuries (Working Note 4) = 0

Gross Income =70,000 Answer

Working Note:-

1) Most workers' compensation benefits are not taxable at the state or federal levels. Workers' compensation is in the same category of non-taxable income as the following:

• Payments from public welfare fund;
• Compensatory (but not punitive) damages for physical injury or sickness;
• Disability benefits under a "no fault" car insurance policy for loss of income or earnings capacity as a result of injuries;
• Compensation for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement

2) Punitive damages are taxable and should be reported as “Other Income” on line 21 of Form 1040, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.

3)There is no income tax levied by the Income Tax Department on medical reimbursements of up to Rs.15,000. The exemption allowed is the cumulative exemption for the fiscal year, on the total amount incurred by the taxpayer for getting any medical treatment of self or any member of family.But he take deduction of 10,000 in 2017. So 10,000 is taxable in year 2018.

4) As a general rule, the proceeds received from most personal injury claims are not taxable under either federal or state law. It does not matter whether you settled the case before or after filing a lawsuit in court. It doesn’t matter if you went to trial and won a verdict. Neither the federal government (the IRS), nor your state, can tax you on the settlement or verdict proceeds in most personal injury claims. Federal tax law, for one, excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer’s gross income.