Derrick was in an automobile accident while he was going to work. The doctor advised him to stay home for eight months due to his physical injuries. The resulting lawsuit was settled and Derrick received the following amounts: How much of the settlement must Derrick include in ordinary income on his tax return?

Question

Derrick was in an automobile accident while he was going to work. The doctor advised him to stay home for eight months due to his physical injuries. The resulting lawsuit was settled and Derrick received the following amounts:  How much of the settlement must Derrick include in ordinary income on his tax return?

Quizplus · Accepted Answer

Generally, damages received on account of personal physical injuries or physical sickness are excluded from gross income. Therefore, Option A ($0) and Option B ($80,000) are incorrect. However, if a portion of the settlement is allocated to punitive damages or interest, that portion is not excludable from income. Therefore, Option D ($175,000) is incorrect. Option C ($95,000) is the correct answer as it represents the amount paid for physical injuries/sickness and is excludable from income.

Derrick Was in an Automobile Accident While He Was Going