611 / How are damage payments taxed if an annuity is used to fund a judgment or settle a claim for damages on account of personal injuries or sickness?
The phrase “other than punitive damages” does not apply to punitive damages awarded in a wrongful death action with respect to which applicable state law, as in effect on September 13, 1995, provides that only punitive damages may be awarded in such an action.3
The rule regarding emotional distress does not apply to any damages that do not exceed the amount paid for medical care, as described generally in IRC Section 213, attributable to emotional distress.
If a lump sum payment representing the present value of future damages is invested for the benefit of a claimant who has actual or constructive receipt or the economic benefit of the lump sum, only the amount of the lump sum payment is treated as received as damages and excludable. None of the income from investment of the payment is excludable.4