Question

In 2019, James got hit by a car. He paid $20,000 in medical expenses, itemizing his deductions. He sued and was awarded $100,000 for physical injury damages and $200,000 for punitive damages, in 2020. He also paid $20,000 more in medical expenses and took the standard deduction. For 2020 James has gross income of:

A. 180,000

B. 200,000

C. 220,000

D. 300,000

Answer 1

For 2020 James has gross inome of 200,000 (Option B). Reasons for answer:

• Under the federal tax code Section 104, you don't pay taxes for damages you receive from “personal physical injuries." So the same is not included in the gross income.
• Punitive damages are not technically intended to compensate a personal injury plaintiff for his injuries—they are meant to punish the defendant for bad conduct. So punitive damages being taxable are being included in gross income.
• Gross income means all your income from all sources before allowable deductions are made. As the question requires gross income, the standard deduction for medical expenses has not been considered.