Emotional Distress: How It Affects Your Income

Suffering from emotional distress? Well, there’s one area where you can stress less: taxes.

Here’s how it works: Emotional distress isn’t the same as physical sickness or physical injury in the eyes of the IRS. However, it’s taxed that way IF the emotional distress is a result of physical sickness or physical injury. What does that mean?

If you receive compensation for emotional distress—and the distress stems from physical sickness or injury—you should not include the damages paid as compensation as part of your income on your tax return.