Question - In January, Ron, a firefighter, was injured in the line of duty as a result of interference by a homeowner. He incurred medical expense of $6,500 related to his injuries. Ron sued the homeowner and was awarded damages of $26,500 in December. The court indicated that $6,500 of the award was for payment of Ron's medical expenses and $20,000 was for punitive damages. Ron has prepared his income tax return for the year and has asked you to review it. You notice that Ron has not reported any part of the award as income and has included the medical expenses in computing his itemized deductions. Write a memorandum to the tax files that summarizes the advice you should give Ron.
Are the punitive damages are taxable income or not, why?