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The general rule is all items received constitute “gross income” and are taxed. However, IRC §104(a), and the corresponding Treasury Regulations, provide an important exception to this rule. Where payments are made to a person as reimbursements for medical expenses, they are excluded from one’s gross income, thus receiving favorable tax treatment. The reimbursements must be for medical expenses incurred for personal injury or personal sickness—even where no physical component exists. See Treas. Reg. §§ 1.104-1(a), 1.213-1. Typically, for reimbursements to be excluded, the payments must pertain to any personal injury or personal sickness for claims arising under tort law.
