Insurance payment: pain & suffering

If it's actually for pain and suffering, it's not taxable. If it's for something related (e.g. lost wages, lost opportunity, punitive damages) it is taxable.

You do not provide enough information. What, specifically, caused your "pain & suffering"?

However, if the award is based purely on emotional and not physical pain and suffering, not at all unheard of, absent physical injury, the settlement is taxable.

Yes, thanks. I'd forgotten about that. It used to be that anything related to personal injuries, even punitive damages, were tax free. That has changed.

On Thu, 1 Oct 2009 11:48:10 EDT, Bill Brown wrote Re Re: Insurance payment: pain & suffering:

Hello Bill,

My son was killed in a boating accident in June. The liability insurance company for the boat/owner wants to make a settlement to my wife and I for "pain & suffering"; although we are only interested in being reimbursed for out-of-pocket medical and funeral expenses. I need to have an idea how that would be handled tax wise.

The insurance company says the policy doesn't cover the medical and funeral expenses, just pain & suffering. We are just starting to talk to them about this and we don't want it to become adversarial because the owner/operator of the boat is a good and close family friend who is as devastated by this as much as we are.

As I understand it, the insurance company would like to consider it a "wrongful death" claim and pay a settlement for (our emotional) pain & suffering. The accident occured in Texas, the insurance company is located in Michigan, and or we and our son live in Alabama. The lawyer handeling the claim for the insurance company is in Texas.

Any background information would be greatly appreciated so that we can approach this with some knowledge.

Thanks

On Thu, 1 Oct 2009 14:08:18 EDT, snipped-for-privacy@panix.com (Arthur Kamlet) wrote Re Re: Insurance payment: pain & suffering:

What if the award is for reimbursement of out-of-pocket expenses resulting from an accidental death?

My condolences to you.

If this is to compensate you for Your, I stress, Your pain and suffering, I would think this is fully taxable.

If this is to compensate you for your son's pain and suffering, I would think it is not taxable.

The payer would have to state this in writing.

And in any case, you might want to discuss this with your own attorney. If your atorney is not famailiar with the income tax aspects of this situation, a local tax professional should be brought in.

Compensatory damages for wrongful death are tax free. As long as no part of the settlement is punitive or for lost income or for medical expenses for which you were reimbursed or took a tax deduction, the payment is not taxable.

Generally, excludible. Accidental death is often a result of a physical personal injury, and inheritances (of insurance) are not income taxable either.

I agree with the above. The insurance document should state who's pain and suffering they are compensating for. His would be preferred.

Are you talking about section 101?

(a) Proceeds of life insurance contracts payable by reason of death (1) General rule Except as otherwise provided in paragraph (2), subsection (d), subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.

Does section 101 apply in this case, where the insurance is liability insurance and not life insurance?

In any case, I don't think the amount is fully taxable. The payment should include a breakdown of how much is a reimbursement of medical and funeral expenses, and how much is just damages. I'm sure they would be able to do that. Only the just damages part should be taxable.

[snip] No. I am talking about section 104(a)(2) and 104(a)(3) and its revenue rulings.

Vic,

My condolences on your loss. It must be a terrible time for you and your wife.

I disagree with Kamlet and Stussy. The payments are being made because of physical injury. There is nothing in the code that requires such excludible payments be made to the person who was injured.

Regards, Bill

Alan,

Payments covered by Section 104 that are computed based on lost wages are still excludible. Medical reimbursements are also excludible but the taxpayer loses the deduction for those medical costs.

Regards, Bill

Vic - I'm so sorry for your loss. It must be really horrible.

I suppose it depends on whether the pain and suffering damages are for those of the son or those of the parents. If for the son then I agree with you. That would seem to come within §401's exemption for payments "on account of personal physical injuries or physical sickness;..."

However if it's for the parents' pain and suffering, seems to me it would come under the statute's mandate that "emotional distress shall not be treated as a physical injury or physical sickness."

Bill

OP stated the payments were to compensate parents for their own pain and suffering. My comments addressed that statement.

Section 104 only covers payments made to the son?

Actually, it does not. The parents suffered emotional pain and distress because of a physical injury which resulted in the death of their son. Therefore the payments to them are excludible.

In Kevin M. O?Gilvie and Stephanie L. O?Gilvie, minors, Petitioners v. United States [96-2 USTC ¶50,664; 117 SCt 452] the Supremes make clear that the only reason settlement payments received by a decedent's minor children were not excludible is the payments were punitive damages. If the payments to the children had not been punitive damages, then those payments would have been excluded from taxation. The same reasoning applies to the OP's situation. The payments are excludible.

I believe it has to be for your own personal injuries, not someone else's.

That case is inapplicable. First of all this specific issue was never brought up in that case.

But more important, that case dealt with §104 as it read in 1988. And then it excluded all damages resulting from personal injuries, including emotional distress. So under the code as it read at that time, the damages were excludible from income even if they were for emotional distress.