It’s All In Your Head: How Neuroscience Can Change The Taxability Of Damage Awards For Emotional Injury
Volume 94, Online
By Virginia Pilgrim [PDF]

The root of this disparate treatment can be found in the Internal Revenue Code and U.S. Treasury regulations, which allow a taxpayer to exclude damages from gross income only if they are awarded for “personal physical injury.” Therefore, taxpayers who suffer from and recover damages for mental and emotional distress are required to include those damage awards in their gross income, but those taxpayers who have bodily injuries may exclude them. However, advancements in neuroscience have established that emotional injuries cause measurable changes in the brain, demonstrating that emotional harm affects the physical body. Because emotional injuries are inherently physical at the physiological level, they are “personal physical injuries” as defined by Section 104(a)(2) of the Internal Revenue Code. Therefore, in order for tax law to reflect a modern, scientific understanding of the brain, damages awarded on account of emotional injury should be excludable from gross income under Section 104(a)(2).