Lesson: Injury Settlements

In this lesson, Nick Palazzolo, CPA, unpacks the complex tax implications of injury awards and settlements, elucidating the stark contrast between how the IRS treats compensation for physical versus non-physical injuries. He candidly explores the taxability of non-physical injury awards, such as those for emotional distress or discrimination, pointing out the unfortunate reality that these are considered taxable income. Nick also makes a distinction between compensatory and punitive damages, explaining when each type applies and their respective tax treatments. Pivotally, Nick clarifies that compensation for actual physical injuries or sickness is largely non-taxable, provided it aims to restore the individual's economic position, covering scenarios from lump sum settlements to periodic payments. This lesson demystifies a nuanced area, ensuring a comprehensive understanding of how different types of legal awards impact tax obligations.