Understanding why Emotional Distress Damages Are Taxable but Physical Sickness Damages Are Not

The general rule for compensatory damages for personal physical injuries is that they are tax free under Section 104 of the Internal Revenue Code. Yet exactly what is physical is not so clear.  For example, if you make claims for emotional distress, your damages are taxable. If you claim the defendant caused you to become physically sick, those can be tax free. If emotional distress causes you to be physically sick, that is taxable. The order of events and how you describe them matters to the IRS.  If you are physically sick or physically injured, and your sickness or injury produces emotional distress, those emotional distress damages should be tax free. Much of this seems artificial, but wording is very important. Some of the distinctions come from a footnote in the legislative history to the tax code adding the ‘physical’ requirement. It says “emotional distress” includes physical symptoms, such as insomnia, headaches, and stomach disorders, which may result from such emotional distress.  All compensatory damages flowing from a physical injury or physical sickness are excludable from income.  For example, in Domeny v. Commissioner, Ms. Domeny suffered from multiple sclerosis (MS). Her MS got worse because of workplace problems, including an embezzling employer. As her symptoms worsened, her physician determined that she was too ill to work. Her employer terminated her, causing another spike in her MS symptoms. She settled her employment case and claimed some of the money as tax free. The IRS disagreed, but Ms. Domeny won in Tax Court. Her health and physical condition clearly worsened because of her employer’s actions, so portions of her settlement were tax free. 

Tired young businessman working at home using lap top and looking Anxious

In Parkinson v. Commissioner, a man suffered a heart attack while at work. He reduced his hours, took medical leave, and never returned. He sued in state court for intentional infliction and invasion of privacy. His complaint alleged that the employer’s misconduct caused him to suffer a disabling heart attack at work, rendering him unable to work. He settled and claimed that one payment was tax free. When the IRS disagreed, he went to Tax Court. He argued the payment was for physical injuries and physical sickness brought on by extreme emotional distress. The IRS said that it was just a taxable emotional distress recovery.

The Tax Court said damages received on account of emotional distress attributable to physical injury or physical sickness are tax free. The court distinguished between a “symptom” and a “sign.” The court called a symptom a “subjective evidence of disease of a patient’s condition.” In contrast, a “sign” is evidence perceptible to the examining physician. The Tax Court said the IRS was wrong to argue that one can never have physical injury or physical sickness in a claim for emotional distress. The court said intentional infliction of emotional distress can result in bodily harm. Notably, the settlement agreement in Parkinson was not specific about the nature of the payment or its tax treatment. And it did not say anything about tax reporting. There was little evidence that medical testimony linked Parkinson’s condition to the actions of the employer. Still, Parkinson beat the IRS. Damages for physical symptoms of emotional distress such as headaches, insomnia, and stomachaches might be taxable. Yet physical symptoms of emotional distress have a limit. For example, ulcers, shingles, aneurysms, and strokes may all be an outgrowth of stress. It seems difficult to regard them all as ‘mere symptoms of emotional distress.’ Extreme emotional distress can produce a heart attack, which is not a symptom of emotional distress. The Tax Court in Parkinson agreed.  Medical records and settlement agreement language can significantly help.

To exclude a payment from income on account of physical sickness, you need evidence of making the claim that the defendant caused or exacerbated his condition. In addition, you need to show the defendant was aware of the claim, and at least considered it in making payment. To prove physical sickness, you need evidence of medical care, and evidence that you actually claimed the defendant caused or exacerbated his condition.

The more medical evidence the better. Moreover, if there is a scant record of medical expenses in the litigation, consider what you can collect at settlement time. A declaration from the plaintiff will help for the file. A declaration from a treating physician or an expert physician is appropriate, as is one from the plaintiff’s attorney. Prepare what you can at the time of settlement or, at the latest, before you file your tax return. Do as much as you can contemporaneously.

Whenever possible, settlement agreements should be specific about the tax treatment of your damage award. The IRS is likely to view everything as income unless you can prove otherwise. Try to be explicit in the settlement agreement about the amount you will receive as wages or other taxable and what form they will be reported on.  You do not want to be surprised by receiving a W-2 or a 1099 the following January of the year after the settlement.

 If you have any questions, feel free to call Gregory Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC provides year round tax planning and tax return preparation.

What Should I Do If I Suspect Medical Malpractice?

Empty wheelchair in hospital

Medical malpractice refers to professional negligence by a health care professional or provider in which treatment provided was substandard and caused harm, injury or death to a patient.

This can be connected to an actual procedure or prescription, including follow up care.

To establish medical malpractice the following elements need to be met.

  1. There must be a duty owed. In a medical malpractice case, a doctor or other medical professional, owes the patient a duty of care. The standard of care is how a similarly qualified practitioner would have performed under the same or similar circumstances
  2. Breach of that duty
  3. The breach of that duty caused injury
  4. There are damages or injury to the patient

You’ve visited your doctor, hospital or the pharmacist and something terrible has occurred. You suspect medical malpractice, yet you may also feel unsure of what steps to take next. What is one to do and how is one to act upon the dilemma?

Simply put, medical malpractice is defined an act of negligence by a health care professional.

Medical Malpractice can include the following situations:

  1. Errors in prescribing
  2. Filling prescriptions for or
  3. Administering medication
  4. Problems during surgery that result from negligence, and even
  5. Issues with negligent or inadequate follow-up care

As a patient, you have the right to seek compensation if you were injured or harmed as a result of medical negligence.

Although patients have the right to seek compensation for any injury, illness or harm that they feel may have occurred as a result of negligence, be advised that medical malpractice cases are complex and costly to win.

It is important to consult with an attorney to determine whether you have a case, and whether that case is worth pursuing.

Before meeting with an attorney, write down what the steps that led to the suspected negligence and what has resulted from the suspected negligence.

Make a list of all doctors that you have visited prior to and after the suspected negligent medical event.

Make a list of all medications that were prescribed to you and which doctor prescribed the medications.

It is very important to choose a medical malpractice attorney with whom you are comfortable working.

If you suspect you have been the victim of medical malpractice, please contact Gregory J. Spadea or David W. Edelman at the Law Office of Spadea & Associates, LLC located in Ridley Park, Pennsylvania at 610-521-0604.

What Should I Do If I Get Into An Auto Accident?

A rear-end car collision
If you are involved in an auto accident try to stay calm and take the following steps:

1. Turn off your vehicle’s engine and leave it where it is as long as it is in a safe place. If you feel threatened or are in danger of being hit by another car, drive your car to a well- lit area .
2. If you or anyone are hurt call 911 for an ambulance and wait in the car for help to arrive. Try to remain calm. You can provide medical aid to others only if you are trained to do so.
3. Evaluate the damage to your vehicle.
4. Call the Police to report the accident by dialing 911.
5. Do not say the accident was your fault even if you think it was and refrain from making any statements to the police. However you will need to provide your driver’s license, registration and insurance card to the police.
6. Ensure the police officer gets the license, registration and insurance card from the other driver if you have not already done so.
7. Write down the other driver’s license plate number.
8. Write the name, address and phone numbers of any witnesses that saw what happened.
9. Call your insurance company to report the accident but do not give a recorded statement unless your lawyer is present.
10. Call an auto repair shop approved by your insurance company and see if they will tow your car to their lot.
11. Do not sign any waivers that your insurance company will send you without having them reviewed by a lawyer.
12. If you were hurt in the accident contact Gregory Spadea at 610-521-0604, to file a personal injury claim within two years of the accident.

Feel free to use the Accident Report Form on my website and keep it in your glove compartment.

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