With child bullying become the issue-threatening-to-destroy-America du jour, Robert Wood at Forbes poses an interesting question: will successful bullying lawsuits be taxable to the recipient, or will they be tax-free under the “personal harm or physical injury” exclusion of Section 104?
Damages for personal physical injuries are tax-free– only punitive damages and interest are taxed. But damages for emotional injuries standing alone are taxable, and some bullying claims don’t involve physical trauma. Still, lines blur. Physical symptoms caused by emotional distress (such as headache) are generally taxed. Although the IRS usually expects observable physical harm for a tax break, the courts are getting more flexible.
For example, bad treatment leading to serious physical sickness like a heart attack should lead to tax free damages. See Parkinson v. Commissioner. The same should be true if bullying exacerbates an existing physical sickness. See Domeny v. Commissioner. See Tax-Free Physical Sickness Recoveries In 2010 And Beyond. The good news is that the law seems to be slowly moving toward a broader exclusion from income. See Is Post-Traumatic Stress Disorder Physical Injury for Tax Purposes?
Now get back to work, you pathetic losers, before I give you a wedgie, wet willy, or even the dreaded rear admiral.