Post-traumatic stress disorder (PTSD) is not a reaction to stress. It is not a temporary state of emotional distress. Medical science has established, through decades of research and neuroimaging evidence, that PTSD produces measurable, structural changes to the human brain. The hippocampus shrinks. The amygdala is altered. The limbic system is disrupted in ways that are objectively visible and verifiable by a physician.
And yet, under the current United States Tax Code, a person who settles a claim on account of PTSD cannot receive those settlement proceeds tax-free.
A person who breaks a bone can. A person diagnosed with cancer can. A person who suffers a spinal cord injury can.
The reason is straightforward: Section 104(a)(2) of the Internal Revenue Code excludes from gross income damages received on account of personal physical injuries or physical sickness. When Congress amended that provision in 1996, medical science had not yet identified the neurological basis of PTSD. The standard that emerged required observable external bodily harm. At the time, that standard was reasonable. Today, it is outdated.
The National Structured Settlements Trade Association (NSSTA) is calling on Congress and the Internal Revenue Service to update the tax treatment of PTSD-related damages to reflect what medical science now confirms: PTSD is a physical disorder, and those who suffer from it deserve the same tax protections already afforded to victims of other physical injuries.
What Is PTSD, and Why Does the Science Matter?
PTSD is a trauma and stressor-related disorder recognized in the Diagnostic and Statistical Manual of Mental Disorders (DSM-5), published by the American Psychiatric Association. It can develop in individuals who have experienced or witnessed a severe traumatic event, including combat, sexual assault, human trafficking, natural disasters, accidents, or abuse.
PTSD was not recognized as a formal disorder by the American Psychiatric Association until 1980. It was not until the mid-1990s that medical researchers began studying its anatomical and physiological effects on the brain and other organ systems in depth. The National Institute of Mental Health recognizes PTSD as a condition that can cause significant distress and interfere with a person’s ability to function in daily life, including sleep, work, and relationships.
Since then, the research has been unambiguous:
• Neuroimaging studies have identified gray matter volume alterations in PTSD patients in the anterior cingulate cortex, insular cortex, frontal and occipital lobes, and medial prefrontal cortex.
• The hippocampus, responsible for forming new memories and regulating learning and emotions, is measurably smaller in individuals with PTSD than in the general population.
• The amygdala, which governs decision-making and emotional responses, is similarly altered.
• Researchers have documented altered amplitude of low-frequency fluctuations in multiple brain regions, as well as comorbid cardiovascular and autoimmune disease in PTSD patients.
These are not symptoms a patient perceives subjectively. They are signs a physician can observe and measure. That distinction is legally significant.
In Parkinson v. C.I.R., the Tax Court drew a clear line between a “symptom” of emotional distress (subjective evidence perceived by the patient) and a “sign” of physical injury or sickness (objective evidence perceptible to the examining physician). Neuroimaging of PTSD patients produces the latter, not the former.
What the Tax Code Currently Says
Section 61 of the Internal Revenue Code provides that gross income includes income from whatever source derived. Section 104(a)(2) creates an exception: damages received on account of personal physical injuries or physical sickness are excluded from gross income, whether received as a lump sum or as periodic payments.
In 1996, Congress amended Section 104(a)(2) to specify that the injury or sickness must be physical in nature, and that emotional distress shall not be treated as a physical injury or physical sickness. Treasury Regulations further clarify that emotional distress is not a physical injury or physical sickness, but that damages for emotional distress attributable to a physical injury or physical sickness are excludable.
The 1996 Conference Report identified the “symptoms” of emotional distress as insomnia, headaches, and stomach disorders. By contrast, PTSD produces discernible anatomical brain changes documented through objective neuroimaging. PTSD is not in the same category as the conditions Congress referenced in 1996 when it enacted the physical injury requirement.
PTSD occupies a legal gray zone under current law. No published Tax Court decision has expressly ruled it in or out of the Section 104(a)(2) exclusion. The IRS has issued no public guidance specifically addressing PTSD. The question remains unresolved, and that ambiguity falls on injury victims.
Who Is Affected?
PTSD affects both veterans and civilians. It affects men, women, and children. It affects those who suffer direct bodily harm and those who witness traumatic events or are subjected to psychological coercion, threats, or exploitation.
There is an important distinction worth noting. Veterans with PTSD have access to benefits and treatment programs administered through the Department of Veterans Affairs. Non-veteran civilians who settle legal claims arising from PTSD do not have an equivalent pathway. For a civilian PTSD claimant, the question of whether a settlement can be structured as a series of guaranteed, tax-free periodic payments under Section 104(a)(2) is not abstract. It directly affects the long-term financial security of the recovery.
Consider the range of cases in which a plaintiff may receive a formal PTSD diagnosis but face uncertainty about the tax treatment of any resulting settlement:
• Sexual abuse in institutional settings
• Human trafficking and forced labor
• Stalking and threats of violence
• Abuse at a daycare or residential facility
• Workplace violence or severe psychological coercion
In each of these cases, the injured person may have no cuts, bruises, or broken bones. Under the IRS’s current interpretation of the observable bodily harm standard, the tax treatment of their settlement remains uncertain, regardless of a formal PTSD diagnosis supported by neuroimaging.
What NSSTA Has Done and What Remains Undone
NSSTA has advocated for formal recognition of PTSD as a physical injury under Section 104(a)(2) through both Congressional engagement and administrative channels.
In the 117th Congress, the Congressional Structured Settlements Caucus, chaired by Representative Jim Langevin, included on its formal agenda the goal of working with Congress to expand Section 104(a)(2) to allow settlements to be used to help resolve medically diagnosed PTSD cases. NSSTA and its partners delivered position papers to Members of Congress identifying the issue and the scientific basis for reform.
18 Members of Congress wrote to then Treasury Secretary Janet Yellen and the IRS Commissioner requesting a revenue ruling clarifying that PTSD and its related damages qualify as physical injuries or sickness excludable under Section 104(a)(2). No revenue ruling was issued.
On May 29, 2025, NSSTA filed a formal request with the U.S. Department of the Treasury and the Internal Revenue Service, asking that PTSD guidance be included in the 2025–2026 IRS Priority Guidance Plan. NSSTA asked the IRS to issue a revenue ruling or chief counsel advice affirming that damages received for clinically diagnosed PTSD qualify as damages for personal physical injury or sickness under Section 104(a)(2), and clarifying the evidentiary burden required to substantiate such claims. As of June 2026, the IRS has not issued a revenue ruling or chief counsel advice in response.
The question has not been resolved administratively. It has not been resolved legislatively. The legal ambiguity affecting PTSD claimants remains in place today.
A Legislative Precedent Worth Noting
In the 119th Congress, the House Ways and Means Committee passed H.R. 2347, the Survivor Justice Tax Prevention Act, by a vote of 41 to 0 on March 25, 2026. The bill, introduced with bipartisan sponsorship by Representatives Lloyd Smucker (R-PA) and Gwen Moore (D-WI), would amend Section 104(a)(2) to exclude from gross income damages received on account of sexual acts or sexual contact, regardless of whether the claimant presents medical records or observable external injuries.
The bill’s logic is directly relevant to the PTSD question. H.R. 2347 explicitly provides that the absence of medical records shall not be treated as failing to substantiate a claim. That principle, applied to PTSD, would mean that a clinically diagnosed condition with a documented neurobiological basis should not be disqualified from the Section 104(a)(2) exclusion merely because the injury does not present as a broken bone or an external wound.
H.R. 2347 has not yet been enacted into law. However, its unanimous passage through the Ways and Means Committee demonstrates that Congress has the will and the precedent to amend Section 104(a)(2) when the science and the equities demand it.
The Coalition Supporting Reform
NSSTA is not alone in this position.
The National Consumers League (NCL), one of NSSTA’s longest-standing strategic partners, has formally adopted a policy position stating that money damages recovered on account of PTSD should be excluded from gross income under IRC Section 104(a)(2). NCL’s position acknowledges directly that at the time Congress amended Section 104(a)(2), medical science was not sufficiently advanced to identify the structural damage done to the brain by PTSD, and that this outdated standard persists today. NCL’s full policy statement is available at nclnet.org.
The American Association of People with Disabilities (AAPD) co-authored the 2022 AAPD/NSSTA Position Paper on Structured Settlements, delivered to every Member of Congress by the Congressional Structured Settlements Caucus Co-Chairs, which identified expanding Section 104(a)(2) to cover medically diagnosed PTSD cases as a named legislative priority. The Caucus page and position paper are available at nssta.com/public-policy/caucus.
What The National Structured Settlements Trade Association (NSSTA) Asks of Congress
June is National PTSD Awareness Month. June 27 is PTSD Awareness Day.
The structured settlements industry calls upon consumer organizations, disability advocates, mental health advocates, and all groups that work on behalf of people living with PTSD to come together to encourage Congress to take action to protect people suffering with PTSD.
The science is clear. The inequity is documented. The legislative tools and administrative mechanisms exist to address it.
It is time for the Tax Code to reflect what medical science has confirmed: PTSD is a physical disorder, and those who suffer from it deserve the same tax protections the law already provides to victims of other physical injuries.
To read NSSTA’s full position on this issue and the supporting white paper, visit NSSTA.com.
Frequently Asked Questions
Is PTSD considered a physical injury under the current Tax Code?
Not explicitly. Section 104(a)(2) excludes from gross income damages received on account of personal physical injuries or physical sickness. The Code provides that emotional distress shall not be treated as a physical injury or physical sickness. PTSD is not classified as emotional distress in the traditional sense under current medical standards, but no IRS revenue ruling and no published Tax Court decision has expressly ruled that PTSD qualifies as a physical injury or physical sickness for purposes of Section 104(a)(2). The question is unresolved as a matter of law.
Can a PTSD claimant currently receive a tax-free structured settlement?
A structured settlement is a stream of guaranteed, periodic payments, funded by an annuity issued by a life insurance company, that qualifies for income tax exclusion under Section 104(a)(2) when the underlying claim is for personal physical injury or physical sickness. Because PTSD’s status under Section 104(a)(2) has not been definitively resolved, the tax treatment of settlements in cases where PTSD is the primary or sole diagnosis remains uncertain. NSSTA’s position, supported by the medical evidence and its advocacy partners, is that such settlements should qualify for the exclusion.
What is NSSTA asking Congress to do?
NSSTA is calling on Congress to amend Section 104(a)(2) of the Internal Revenue Code to explicitly include PTSD, when clinically diagnosed, within the definition of personal physical injury or physical sickness. Medical science has advanced significantly since the 1996 amendment to the Code. The neurological basis of PTSD is now documented and objectively measurable. The definition in the Tax Code should reflect that reality.
What is NSSTA asking the IRS to do?
Pending Congressional action, NSSTA has formally requested that the IRS include PTSD guidance in its Priority Guidance Plan and issue a revenue ruling or chief counsel advice affirming that damages received for clinically diagnosed PTSD, supported by objective neuroimaging or other clinical evidence, qualify for exclusion from gross income under Section 104(a)(2).
Has any legislation been introduced in Congress specifically on this issue?
As of June 2026, no standalone bill has been introduced in the 119th Congress, or in the 117th or 118th Congresses, to amend Section 104(a)(2) specifically to address PTSD. The advocacy effort has focused on the administrative track through IRS guidance requests and Congressional education. However, H.R. 2347 (Survivor Justice Tax Prevention Act), which passed the House Ways and Means Committee 41 to 0 in March 2026, demonstrates current Congressional willingness to amend Section 104(a)(2) for injury categories not currently covered by the statute.
Why does this matter for structured settlements specifically?
A structured settlement provides a stream of guaranteed, tax-free periodic payments for a claimant whose recovery qualifies under Section 104(a)(2). Where PTSD is the underlying diagnosis, the inability to confirm tax-free treatment creates uncertainty for the claimant, the plaintiff attorney, and the settlement process. Resolving that uncertainty through a revenue ruling or a legislative amendment would allow PTSD claimants to access the same long-term financial security available to claimants with other qualifying physical injuries.
The National Structured Settlements Trade Association (NSSTA) is the national trade association representing the structured settlements industry. NSSTA advocates for the preservation and expansion of Section 104(a)(2) of the Internal Revenue Code to protect the financial security of injured people and their families.
