Question

Shawna was hurt in an automobile accident which was the other driver's fault. She received a cash settlement from the insurance company that paid $10,000 in lost wages, $50,000 to cover medical bills, and $25,000 for punitive damages. How much of what Shawna received is taxable for income tax purposes?

Answer 1

Lost Wages – Taxable

Medical Bills – Not taxable

Punitive Damages – Taxable

Medical bills: These amounts are excluded because they arise out of a physical injury. You won’t pay taxes on this amount.

Lost wages: You must pay taxes on this amount because it is not excluded from your gross income.

punitive damages: These are not to compensate for any loss. They are taxable under all conditions

Lost Wages + Punitive Damages = 10,000 + 25,000 = $35,000

Therefore, Amount $35,000 received by Shawna is taxable.