Gulf Oil Spill: Tax Related Q&A

Q: Is an individual required to include in gross income payments the individual receives for personal physical injuries or physical sickness, or for emotional distress that is attributable to personal physical injuries or physical sickness?

A: No. An individual generally is not required to include in gross income payments the individual receives on account of personal physical injuries or physical sickness. Personal physical injuries include observable bodily harm such as bruises, cuts, swelling, and bleeding. Likewise, an individual is not required to include in gross income payments the individual receives for emotional distress that is attributable to personal physical injuries or physical sickness. Payments for personal physical injuries or physical sickness, or emotional distress attributable to personal physical injury or physical sickness, are not required to be reported on an information return filed with the IRS by the person making the payment. 

Q: Is an individual required to include in gross income payments the individual receives for emotional distress (or symptoms of emotional distress such as insomnia, headaches, or stomach disorders) that is not attributable to personal physical injuries or physical sickness? 

A: Yes. The law requires an individual to include in gross income payments the individual receives for emotional distress (or symptoms of emotional distress such as insomnia, headaches, or stomach disorders) that is not attributable to personal physical injuries or physical sickness. However, an individual excludes from gross income payments for emotional distress up to the amount of medical care expenses the individual paid related to the emotional distress if the individual did not deduct the expenses in a prior taxable year. 

Q: Are payments made to an individual for emotional distress that is not attributable to personal physical injuries or physical sickness required to be reported to the IRS by the person making the payment? 

A: Yes. A person making a payment to an individual for emotional distress that is not attributable to personal physical injuries or physical sickness must report the payment to the IRS on a Form 1099-MISC, Miscellaneous Income, if it is $600 or more. If the individual does not furnish the individual's taxpayer identification number to the payor, the payor must backup withhold on the payment at a rate of 28 percent.

Keith Jones is a CPA with an office in Port St. Joe