Personal Injury Awards for Pain and Suffering are Tax Free
The concept of money damages as compensation for pain and suffering is intended to make the injury victim “whole”. Obviously money will not unbreak a bone or re-align spinal discs, but courts, as a scientific and medical fact, simply cannot do so. Hence, the system attempts to provide compensation to an injury victim that is commensurate with the pain and suffering the injury has caused. It would be fundamentally unfair to tax a personal injury award, as this would result in something far less than being made “whole”. Therefore, both the IRS and the New York State Department of Taxation make such awards free from income tax and this makes sense because the money you recover is not “income”; it is compensation for harm suffered.