The bill changes Internal Revenue Code section 104(a)(2) so that damages (other than punitive damages) received because of sexual acts or sexual contact are excluded from gross income. It borrows the criminal‑law definitions of "sexual act" and "sexual contact" from 18 U.S.C. 2246 to identify covered payments.
The bill also narrows what the government may demand to substantiate such an exclusion: a judgment or settlement that expressly states the damages are on account of a covered sexual act or contact is sufficient, and taxpayers cannot be denied the exclusion for lack of medical records. The measure contains targeted effective‑date rules for judgments and settlements and directs Treasury to run an outreach program with the DOJ Office on Violence Against Women to publicize the change.
At a Glance
What It Does
It amends IRC §104(a)(2) to treat non‑punitive damages tied to defined "sexual act" or "sexual contact" as tax‑exempt, and it adds a new subsection limiting evidence the IRS may require to substantiate that characterization. It also instructs Treasury to publicize the exclusion in coordination with DOJ OVW.
Who It Affects
Survivors who receive civil‑law damages or settlements for sexual acts or contact, plaintiffs’ counsel drafting releases and settlement agreements, defendants and their insurers negotiating settlements, and the IRS and Treasury for administration and outreach.
Why It Matters
The change removes a longstanding tax barrier for many sexual‑assault survivors receiving compensation and reduces pressure to disclose medical records to claim the tax benefit, but it also creates new drafting, valuation, and enforcement questions for settlements and tax administration.
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What This Bill Actually Does
The bill modifies the tax code’s treatment of compensatory awards so that payments tied to sexual misconduct are no longer treated as taxable income. Instead of limiting the §104(a)(2) exclusion to 'personal physical injuries or physical sickness,' the amendment explicitly adds payments received on account of a "sexual act" or "sexual contact," using the definitions in 18 U.S.C. 2246.
The exclusion still excludes punitive damages.
To reduce demands on survivors’ private records, the bill creates a procedural rule for substantiation: a judgment or settlement that states the payment is "on account" of a covered sexual act or contact is sufficient for the tax exclusion. The bill also bars denying the exclusion solely because medical records do not exist.
Practically, that means settlement agreements and judgments will need clear labeling to secure the exclusion, and parties will have an incentive to include explicit tax‑related language in release documents.The effective‑date provisions make the exclusion operative for judgments and agreements only if payments occur after enactment, with a special rule that treats a judgment as made after enactment only if the first payment happens later. The bill prevents backdating by saying that revised or replacement agreements that merely update pre‑enactment settlements will not qualify as new, post‑enactment agreements.
Finally, Treasury must run an outreach program, in consultation with DOJ OVW and other agencies, to ensure survivors, practitioners, and administrators know about the exclusion and how to claim it.
The Five Things You Need to Know
The bill amends IRC §104(a)(2) to exclude from gross income non‑punitive damages received on account of a "sexual act" or "sexual contact," as defined in 18 U.S.C. 2246(2)‑(3).
A judgment or settlement that expressly states the damages are 'on account' of a covered sexual act or contact is sufficient substantiation for the tax exclusion.
The bill prohibits denying the exclusion solely because there are no medical records documenting the sexual act or contact.
Effective date rules: the exclusion applies only to judgments and agreements with payments made after enactment, a judgment is treated as made after enactment only if first payment occurs after that date, and replacement agreements that supplant pre‑enactment agreements do not qualify as new agreements.
The Secretary of the Treasury must run a public‑awareness program, coordinated with the DOJ Office on Violence Against Women and other agencies, to publicize the new exclusion.
Section-by-Section Breakdown
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Amendment to IRC §104(a)(2) — adds sexual acts and contact
This subsection replaces the phrase 'on account of personal physical injuries or physical sickness' with a two‑prong formulation that keeps physical‑injury coverage and adds payments on account of 'any sexual act' or 'sexual contact' defined by reference to 18 U.S.C. 2246. The practical effect is to broaden the statutory exclusion to include compensatory awards tied to sexual misconduct without creating a standalone new definition in the tax code. Using the federal criminal definitions reduces drafting burden but imports a legal standard developed for criminal prosecutions rather than civil damages.
New substantiation rule limiting documentation demands
The bill inserts a new §104(d) that makes a judgment or settlement statement sufficient evidence that damages are 'on account' of a sexual act or contact. It also expressly forbids treating an absence of medical records as a reason to deny the exclusion. For practitioners, this shifts the compliance focus to the language of judgments and releases rather than medical or clinical proof, and it reduces the pressure on survivors to produce sensitive health records to get the tax benefit.
Targeted effective‑date and anti‑backdating rules
The effective‑date language applies the amendments only to damages received under judgments and agreements after enactment. It treats a judgment as 'made' after enactment only if the first payment occurs after enactment, and it bars treating a revised or replacement agreement as a post‑enactment agreement if it simply updates an agreement entered into on or before enactment. Those mechanics aim to prevent retroactive tax planning while still allowing genuinely new settlements to qualify, but they will require attention when structuring payment schedules and amendments to pre‑existing releases.
Mandated Treasury outreach in coordination with DOJ OVW
The bill directs the Secretary of the Treasury, in consultation with the DOJ Office on Violence Against Women and other federal agencies, to run a public awareness program about the exclusion. That obligation creates an administrative task for Treasury to update guidance, taxpayer forms, and outreach materials and signals an intent to ensure survivors and counsel know how to claim the exclusion without exposing sensitive records.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Survivors receiving compensatory awards: They gain a clear path to keep previously taxable settlement or judgment proceeds and face reduced pressure to disclose medical records to claim the tax benefit.
- Plaintiffs’ attorneys and advocates: They can advise clients to include straightforward tax‑exclusion language in settlements, simplifying tax counseling and reducing the need to gather sensitive substantiation.
- Victim‑support organizations and legal clinics: Reduced financial penalties on settlements increases resources available to survivors and removes a barrier to accepting compensation.
Who Bears the Cost
- Federal Treasury/IRS: The exclusion reduces federal taxable income receipts for affected awards and creates administrative burdens to implement guidance and outreach.
- Defendants and their insurers: Because plaintiffs retain more after‑tax dollars, defendants may face pressure to increase gross settlements or adjust valuation, and insurers must adapt claims‑valuation and reserve practices.
- Tax administrators and compliance functions: The IRS will need to issue new guidance, update forms and training, and develop audit protocols to detect mischaracterized payments while respecting survivor privacy.
Key Issues
The Core Tension
The central dilemma is protecting survivors’ privacy and after‑tax recovery while preventing a new avenue for tax avoidance and disputes: the bill lowers evidentiary burdens to spare survivors from documenting trauma, but that same relaxation makes it easier to label or apportion payments as "sexual‑act" damages for tax benefit, creating a trade‑off between compassionate administration and the risk of abuse and revenue loss.
Linking the exclusion to criminal‑law definitions in 18 U.S.C. 2246 is administratively efficient but legally awkward. Those definitions arose in a criminal context with elements and interpretive history that differ from civil torts and state‑law sexual‑assault definitions, so disputes are likely about whether particular conduct in a civil settlement fits the federal statutory wording.
Plaintiffs and defendants will therefore have incentives to draft settlement language carefully — and sometimes aggressively — to secure the tax outcome.
The sufficiency rule that a judgment or settlement statement alone supports the exclusion protects survivor privacy by limiting medical‑record demands, but it also raises fraud and labeling risks. Parties could label mixed‑purpose payments (economic losses, emotional distress, punitive elements) as "on account" of a sexual act to secure tax benefits; the IRS will need standards for apportionment and challenge.
The effective‑date and replacement‑agreement rules try to curb retroactive recharacterization, but they leave room for parties to restructure payment timing or amend releases in ways that raise interpretive disputes. Finally, the outreach mandate helps implementation but requires resources and careful messaging so survivors don’t feel compelled to use explicit language that might expose them to stigma or breach confidentiality agreements.
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