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Yes, lost time from work is taxable. If you receive "punitive damages", that, too, would be taxable.

Hi Donna,

Are you sure about this? I was looking at Pub. 525 today and found this on page 17 under Other Sickness and Injury Benefits:

Other compensation. Many other amounts you receive as compensation for sickness or injury are not taxable. These include the following amounts.

1. Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments.

2. Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income.

3. Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.

4. Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits.

I think 3 and 4 are applicable and maybe 1. It's the car insurance policy making the payoff and he received some permanent scarring. The settlement is the first offer made by the insurance company to settle the accident claim. No lawywers involved at this point (and probably unlikely).

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