Under present law, gross income does not include any damages received (whether by suit or agreement
and whether as lump sums or as periodic payments) on account of personal injury or sickness (sec.
The exclusion from gross income of damages received on account of personal injury or sickness
specifically does not apply to punitive damages received in connection with a case not involving physical
injury or sickness. Courts presently differ as to whether the exclusion applies to punitive damages received
in connection with a case involving a physical injury or physical sickness.
Certain States provide that, in
the case of claims under a wrongful death statue, only punitive damages may be awarded.
Courts have interpreted the exclusion from gross income of damages received on account of personal
injury or sickness broadly in some cases to cover awards for personal injury that do not relate to a physical
injury or sickness. For example, some courts have held that the exclusion applies to damages in cases
involving certain forms of employment discrimination and injury to reputation where there in no physical
injury or sickness. The damages received in these cases generally consists of back pay and other awards
intended to compensate the claimant for lost wages or lost profits. The Supreme Court recently held that
damages received could not be excluded from income.
REPORTING OF DAMAGE AWARDS ON FORMS 1099-MISC
Box 3 of Form 1099-MISC is used to report other income that is not reportable in one of the
other boxes on the form. Generally, all punitive damages (even if they relate to physical injury or
physical sickness), any damages for non-physical injuries or sickness, liquidated damages
received under the Age Discrimination in Employment Act of 1967, and any other taxable
damages are required to be reported in box 3. Generally, all compensatory damages for nonphysical
injuries or sickness (for example, emotional distress) arising from employment
discrimination or defamation are reportable in box 3. However, if a taxpayer receives an award
of back pay that constitutes wages, it generally would be reportable on Form W-2, not Form