Fertility damages may be excludible from income

Tax Hot Topics newsletterThe IRS held in a private letter ruling (PLR 201950004) to provide guidance on withholding from periodic payments for pensions, annuities, and other deferred income for the 2020 calendar year.

The taxpayer’s newborn child suffered from multiple physical, cognitive, and behavioral disabilities stemming from a genetic condition. According to the findings in the taxpayer’s lawsuit, the fertility clinic failed to test the anonymous donor egg or the embryo for the gene that causes the genetic disorder prior to implanting it. In response, the taxpayer sought damages for her child’s physical injuries and physical sickness as well as for her own emotional distress due to caring for the child’s genetic condition. The taxpayer received a settlement for her lawsuit claims against the clinic for a single lump-sum amount.

The IRS determined that the amount the taxpayer received in settlement of her claims was to compensate for actual damages attributable to personal physical injury or physical sickness, including the emotional distress attributable to those injuries. Accordingly, it ruled that the settlement amount for the damages is excludible from the taxpayer’s income, other than amounts reimbursed for medical expenses previously incurred and deducted.

Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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