Tax law excludes from “gross income” damages received for “personal physical injuries or physical sickness,” if certain conditions are met. The damages must be based on a wrongful act resulting in injury and they must be awarded for physical injuries or illness. There must be a “direct causal link” between the damages and the injury. One taxpayer was injured while at a hospital and sued for negligence but lost her case. She then sued her attorney for legal malpractice and was awarded $125,000. The IRS said the amount was taxable because it wasn’t for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed. (Blum, 3/23/22)
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