TAXABILITY OF DAMAGE AWARDS The law permits individuals to exclude from gross income only those damages which are received on account of a personal physical injury or a physical sickness. Thus, when a law suit is based on a physical injury or sickness, then all damages (other than punitive damages) flowing from that injury or sickness are treated as payments received on account of a physical injury or sickness,whether or not the recipient of the damages is the injured party. As a result, these damages are excludable from gross-income. For purposes of this exclusion, emotional distress is not considered a physical injury or physical sickness. So, an award under state law which is meant to compensate for emotional distress caused by age discrimination would have to be included in gross income. However, if you required medical care for treatment of the consequences of emotional distress, then the amount of damages not exceeding those expenses would be excludable from gross income. Punitive damages for any personal injury claim, whether or not physical, are not excludable from gross income unless awarded under certain state wrongful death statutes that provide for only punitive damages. The law does not consider back pay and liquidated damages received under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Thus, an award for back pay and liquidated damages under ADEA must be included in gross income. Keep in mind that while you want the best tax result possible from any age discrimination action you are considering, non-tax legal factors will probably determine the amount of your after-tax recovery.