IRS Information Letter: Settlement Proceeds for Physical Injuries, Sickness Are Excludible From Gross Income (IRC §104)

For damages from a breach of contract settlement to be excludible from gross income, the damages must be received on account of personal physical injuries or physical sickness, the IRS determined. However, damages received for emotional distress do not qualify for this exclusion, unless they are recovered because of a personal physical injury or physical sickness or are less than the amount paid for medical care due to the emotional distress, the IRS stated. Taxpayer filed a lawsuit against a potential employer who hired her for a new job but cancelled the employment contract without cause. Taxpayer claimed the stress ...