I was going through a series
of articles that I received from the Texas Psychological Association (TPA), and
I was absorbed by an article, “Are Damages For Depression Tax-Free?”. This
title is eye catching for me as a mental health and information specialist because many individuals
are unaware of tax issues relative to punitive damages that emanate from
physical injuries, physical sickness, and mental health. The first few
sentences of the article place the reader in the scenario as the individual
who: is fired by an employer, falls into a deep depression and subsequently
sues the employer. The question presented is whether the money received from
settlement is taxable. This discussion interests me because many individuals
are in situations that permit them to say, “My employer is making me sick!”
So, let us first gain some
insight into what exactly is meant by “Damages for Depression”. The “Damages”
that is referred to in this article is referencing the money that is awarded by
the court for any loss or injury that resulted as a result of a wrong or
negligent act of another party. The damages awarded by the court are punitive
in the example provided, if the employer was found to be the cause of depression
or any other physical sickness or injury. The main purpose of awarding punitive
damages is to punish the defendant for the injury that they caused. The article
informs us that damages in cases of physical injuries are tax-free under
Section 104 (26 USC § 104- Compensation for injures or sickness). The only
thing is that the code clearly states that emotional distress is not treated as
a physical injury or physical sickness. Depression can potentially fall into
this category.
Those of you who are
concerned because of the potential taxation of punitive damages that are
received for emotional injuries should be made aware that there are advocates
for the cause. Nina Olson is a National Taxpayer Advocate who appears before
Congress addressing various tax issues on behalf of the general public. In her 2009 Annual Report, she has a section titled "Exclude Settlement Payments for Mental Anguish, Emotional Distress, and Pain and Suffering from Gross Income". She
argued the case for uniformity in the taxation of emotional and physical
injuries. Ms. Olson requested that tax law be amended to include emotional
injuries as a tax-free entitlement. I must note that this was done with the use
of evidence-based research to demonstrate the physical elements of depression
and other disorders.
Advocates who present issues such as this one to Congress are necessary. It is the only way that
government officials and the general public are made aware of the
evidence-based research that affects public policy. Members of the mental
health community are well aware of the biological, psychological, and social
issues that surround various mental health disorders such as depression. The
medical community also acknowledges the biological causes of mental disorders.
One online medical research source, Medline Plus, advertises that they are a
trusted source for health information since it is a service provided by the
U.S. National Library of Medicine. This trusted source indicates that
depression is a serious medical illness that involves the brain.
So, if we were to look at
the scenario that was provided by the article, it would appear that depression
should be a tax-free punitive damage because it is a serious medical illness
that involves the cognitive and chemical activity in the brain. My opinion is
that there should be no discrimination between physical and emotional injuries
that is caused by another party. If evidence is provided that supports the
claim and punitive damages were awarded, than the compensation received should
be tax-free. It almost seems as if the IRS is penalizing the victim for
punishing the transgressor by taking a portion of what was awarded for their
injuries. That seems like further victimization.
For more information on tax law, check out the Robert W. Wood, contributor to Forbes magazine.
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