Our North Carolina personal injury attorney explains that most personal injury proceeds are not counted as gross income for federal income tax purposes. Therefore, compensatory damages received for pain and suffering and medical expenses as a result of a personal injury of sickness is not taxable regardless of whether the award is from a settlement or verdict. Any compensation received for lost wages, however, may be subject to taxation. Additionally, punitive damage awards are taxable and included as gross income. Punitive damages are awarded to punish defendants for their culpable conduct and to send a deterrence message to others. In calculating punitive damages, a court may take into account the net worth of a defendant in order make sure the award is large enough to hit the defendant where it hurts—to “hit them in the pocketbook” so to speak.