What damages are exempted under IRC section 104?
Asked by: Curtis Lubowitz Jr. | Last update: February 7, 2026Score: 4.8/5 (73 votes)
Under IRC Section 104, damages excluded from gross income are those received for personal physical injuries or physical sickness, including compensation for medical bills, lost wages, pain, suffering, and emotional distress directly tied to a physical injury, but punitive damages are explicitly excluded (taxable). This covers settlements from car accidents, slip and falls, or medical malpractice, but taxability hinges on the source and allocation of funds, with non-physical claims (like pure emotional distress) generally taxable.
What is the Section 104 exclusion?
Section 104(a)(1) of the IRS code provides that an amount equal to 50 percent of your final compensation may be excludable from your gross income for federal tax purposes. Any cost-of-living adjustment (COLA) attributable to that amount may also be excludable.
Which damages are not taxable?
Under IRS Section 104, income from damages relating to physical injuries or illness is exempt from taxation. That means that personal injury claims are generally not taxable.
What are considered non-economic damages?
Non-economic damages refers to compensation for subjective, non-monetary losses such as pain, suffering, inconvenience, emotional distress, loss of society and companionship, loss of consortium, and loss of enjoyment of life.
What are the three types of compensatory damages?
Medical Expenses: Hospital bills, surgeries, medications, and rehabilitation. Lost Wages: Income lost during recovery and reduced earning capacity. Property Damage: Repairs or replacement of damaged property.
Lawsuit & Settlement Tax Rules in the US: What’s Taxable & What’s Not
Which of the following types of damages are not considered compensatory?
Punitive damages are not designed to compensate the victim, but to punish the defendant for inflicting the victim's injuries and to deter others from engaging in similar behavior.
What are the six types of damages?
There are six different types of damages: compensatory, incidental, consequential, nominal, liquidated, and (sometimes) punitive.
Which of the following are considered to be non-economic damages?
Non-economic damages compensate for intangible, subjective consequences of an accident. This includes physical pain and suffering, emotional distress, humiliation, loss of companionship, and loss of enjoyment of life. The amount awarded depends on various factors, including long-term effects and strength of evidence.
What are the four types of damages?
The four main types of legal damages are Compensatory (to cover actual losses like medical bills, lost wages), Consequential (indirect but foreseeable losses, like lost profits), Punitive (to punish egregious behavior), and Nominal (symbolic awards for rights violated without major harm). Sometimes, Liquidated damages (pre-set amounts in contracts) are also considered a key category.
What damages are not excluded from gross income?
Punitive damages are not excludable from gross income, with one exception. The exception applies to damages awarded for wrongful death, where under state law, the state statute provides only for punitive damages in wrongful death claims.
What settlements are not taxed?
Non-taxable legal settlements generally involve compensation for physical injuries or sickness, including associated medical expenses and emotional distress directly tied to the physical harm, plus workers' compensation payments, and awards for wrongful death (in specific cases) or wrongful incarceration, while punitive damages, lost wages, and emotional distress not tied to a physical injury are usually taxable. The key is the origin of the payment: damages for physical harm are usually tax-free, whereas payments for economic or non-physical losses are generally taxed as income.
What is the IRC 104 A?
Section 104(a) provides an exclusion from gross income with respect to certain amounts described in paragraphs (b), (c), (d) and (e) of this section, which are received for personal injuries or sickness, except to the ex- tent that such amounts are attrib- utable to (but not in excess of) deduc- tions allowed under ...
What type of compensation is not taxable?
Non-taxable compensation includes specific benefits and payments like workers' compensation, child support, gifts, inheritances, welfare payments, life insurance proceeds, disaster relief payments, and certain scholarships, as well as some employer-provided benefits such as health insurance reimbursements, qualified pension plan distributions, and educational assistance used for tuition/books. It's income not subject to federal income tax, though you must still keep records and sometimes report it, and it doesn't count toward your gross income for filing thresholds.
What kind of damages are not taxable?
Only damages for "personal physical injuries or physical sickness" are excludable from income.
What is Section 104 of the Income Tax Act?
104 (1) In this Act, a reference to a trust or estate (in this Subdivision referred to as a “trust”) shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the ...
What is the difference between Section 106 and 104?
Section 104 – It sets out that the owner of a property or site is entitled to have newly created drainage (or pupping station) adopted by the local water company. Section 106 – this agreement allows the owner of a site or property to connect drainage into the local public sewerage system.
What are the three categories of damages?
What are the 3 Types of Damages? There are three types of damages in personal injury claims: non-economic damages, economic damages, and punitive damages. Special and general damages are alternative terms used to describe economic and non-economic losses.
What are statutory damages?
Statutory damages are a type of damages awarded in a successful claim to compensate for an injury or loss, whose amount is pre-established by statute. Statutory damages are commonly used in areas of the law in which it might be complex to establish the degree of harm or loss caused to the plaintiff.
What are non-punitive damages?
Compensatory damages compensate you for your losses, while punitive damages are awarded to punish the defendant and deter others from similar conduct. Punitive damages are only available in limited cases when you have clear and convincing evidence of deliberate misconduct or gross negligence.
Which damages are not recoverable?
Direct damages are the easiest to foresee. For this reason, special damages are not usually recoverable. Special damages are meant to compensate the innocent party for injury or loss that is indirectly related to the breach.
How to prove non-economic damages?
It is important to gather various types of evidence that support the plaintiff's claim for non-economic damages. This can include medical records, photographs, videos, or any other documentation that demonstrates the extent of the injury and its impact on the plaintiff's life.
What are the five types of damages?
There are five important types of damages that might be available, depending on your situation: compensatory damages, specific performance, an injunction, liquidated damages, or rescission. If you are dealing with a potential breach of contract, you probably need legal advice on what you should do next.
What damages can be awarded in a civil lawsuit?
A review of California civil damages, especially as they pertain to civil-rights cases
- Damages for wrongful death. ...
- Economic damages. ...
- Non-economic damages. ...
- Punitive damages. ...
- Pain and suffering damages. ...
- Damages in federal court. ...
- Nominal damages. ...
- Bane Act damages.
What are the most frequently awarded legal damages?
Compensatory damages are the most common form of damages awarded in civil cases. They are awarded to cover the losses the injured party suffered due to the defendant's actions, essentially making the injured party “whole” again. These damages can be economic or non-economic.
What is the burden of proof for damages?
If you are the plaintiff (the person who started the case), then you have the "burden of proof." You must prove to the court that your version of what happened is true. You must collect and submit evidence to the court that your version of the events is true.