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IRS Won’t Tax Physical Injury Damages

WASHINGTON (CN) - Damages awarded for physical injuries or physical sickness are nontaxable, regardless of whether the injury or sickness was part of a tort claim, the Internal Revenue Service says in a new regulation.

Previously, the damages only could be excluded from gross income if the injury or sickness was the result of a tort action that allowed for other forms of settlement and where the acts of the opposing party were directly connected to the injuries or sickness.

The test is no longer needed because case law and the Small Business Job Protection Act of 1996 make it clear that only damages awarded in a lawsuit directly linked to personal, physical injury or sickness are excludable from gross income calculations, according to the IRS.

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