In two cases decided in 2010, the U.S. Tax Court indicated that damages compensating for stress-induced physical ailments may be tax-free where (1) the taxpayer can demonstrate that the damages were actually received on account of those ailments and (2) the physical nature of the ailments was verified by a physician, preferably based on objective medical evidence rather than the taxpayer’s subjective report of symptoms. In the Tax Court’s July 11, 2012, decision in Blackwood v. Commissioner, T.C. Memo 2012-190, the taxpayer did not satisfy this standard, highlighting the difficulty of establishing that damages compensating for stress-induced physical ailments are excludable from income.
Continue reading in the PDF below. Original publication in Practical Tax Strategies.