Under what condition are damages for injury included in taxable income?

Damages for injury are included in taxable income unless specifically exempted under Internal Revenue Code Section 104. This section outlines situations where certain types of damages, particularly those related to personal physical injury or physical sickness, may be excluded from gross income. For example, compensatory damages received for physical injuries are typically not taxable, while punitive damages or those related to emotional distress are generally included in taxable income unless they are connected to a physical injury.

Understanding this exemption is crucial for taxpayers, as it directly affects reporting obligations and the amount of taxable income. Therefore, recognizing the conditions under which damages are taxable helps in accurately determining tax liability and compliance with tax laws.