Is compensation for personal injuries included in gross income?

Compensation for personal injuries is generally excluded from gross income under the Internal Revenue Code. This means that if an individual receives a settlement or award for physical injuries or illness, that compensation is typically not subject to income tax. The rationale behind this tax treatment is that the award is intended to cover medical expenses and other costs associated with the injury, thus restoring the individual's financial situation rather than providing additional income.

However, it's important to distinguish between different types of damages. For instance, while compensation related to physical injuries is tax-exempt, punitive damages, which are intended to punish the wrongdoer and deter similar conduct, are indeed taxable. This distinction clarifies why other options related to punitive damages or jurisdictional factors are not the correct answer in this context.

Therefore, individuals should know that awards for physical personal injuries usually do not add to their gross income, allowing them to receive those funds without tax implications.