Wrongfully Incarcerated Individuals

Amounts Received by Wrongfully Incarcerated Individuals Exempt from Tax

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Income received because a person served time in prison for a crime they did not commit is no longer taxable income. This is a brand new provision in the tax code and opens the possibility of refunds for people who paid tax on such income in previous years.

Exclusion from gross income of certain amounts received by wrongly incarcerated individuals: New section 139F provides that money received because a person was wrongfully imprisoned for a crime he didn't commit is excluded from income tax.

To qualify,

  • a person must have been convicted of a criminal offense under federal or state law,
  • the person served all or part of their prison sentence, and
  • was pardoned, granted clemency or amnesty because the person was innocent, or the judgment is reversed or vacated after a new trial.

The exclusion is effective beginning tax year 2016 and is retroactive for all previous tax years.

This new tax rule is part of the  Protecting Americans from Tax Hikes Act of 2015, which was enacted into public law on December 18, 2015.

Normally, individuals have just three years from the original filing due date to seek a refund of overpaid federal income taxes. This new exclusion from income applies retroactively to all previous tax years. The new tax law includes a special waiver of the normal three-year statute of limitations on tax refunds. Under this special waiver, individuals impacted by this new tax law can file amended returns and claims for refunds of overpaid tax for any previous tax year as long as their claim for refund is filed before December 18, 2016.

For amended returns or claims filed after this date, the IRS will pay out refunds of overpaid tax only if the claim relates to a tax year still open under the normal three-year statute of limitation.

Concise Summary from the IRS:

"Certain amounts received by wrongfully incarcerated individuals. Certain amounts you receive due to a wrongful incarceration may be excluded from gross income.

See section 139F for more information. Note. This new law was enacted December 18, 2015 as part of P.L. 114-113 and applies to all tax years. Generally, you have 1 year from its enactment to claim a credit or refund if you included such amounts in gross income in previous years, even if that claim is otherwise not allowed by law." (Source: IRS.gov, Publication 525, Taxable and Nontaxable Income, section on  What's New.)

Wait until the IRS releases further guidance before amending a previous tax return to seek a refund.

"Wrongfully incarcerated individuals.   Certain amounts you receive due to wrongful incarceration may be excluded from gross income. If you included these amounts in income in a prior year, you may be able to amend your return to claim a refund or credit against tax. Additional guidance is being developed." (Source: IRS.gov,  Instructions for Form 1040X, section on  What's New.)

 

Excerpt from the Technical Explanation by the Joint Committee on Taxation

   

4. Exclusion from gross income of certain amounts received by wrongly incarcerated individuals (sec. 304 of the bill and new sec. 139F of the Code)

Present Law

The taxability of damages, i.e., the amounts received as a result of a claim or legal action for compensation for injury, depends upon the nature of the underlying claim. If a direct payment on the underlying claim would be includible as income under section 61, and no specific exemption for that type of income is otherwise provided in the Code, then damages intended to compensate for loss of that includible income are themselves includible income.471 Section 104 of the Code specifically excludes from gross income most compensation for physical injuries or physical sickness. Damages for non-physical injuries, such as mental anguish, damage to reputation, discrimination, or lost income, are not within the purview of the section 104 exclusion. Compensation related to wrongful incarceration but not physical injuries or physical sickness is not specifically addressed by the Code.

Explanation of Provision

Under the provision, with respect to any wrongfully incarcerated individual, gross income shall not include any civil damages, restitution, or other monetary award (including compensatory or statutory damages and restitution imposed in a criminal matter) relating to the incarceration of such individual for the covered offense for which such individual was convicted.

A wrongfully incarcerated individual means an individual:

(1) who was convicted of a covered offense;
(2) who served all or part of a sentence of imprisonment relating to that covered offense; and
(3) (i) was pardoned, granted clemency, or granted amnesty for such offense because the individual was innocent, or
(ii) for whom the judgment of conviction for the offense was reversed or vacated, and whom the indictment, information, or other accusatory instrument for that covered offense was dismissed or who was found not guilty at a new trial after the judgment of conviction for that covered offense was reversed or vacated.

 

For these purposes, a covered offense is any criminal offense under Federal or State law, and includes any criminal offense arising from the same course of conduct as that criminal offense.

The provision contains a special rule allowing individuals to make a claim for credit or refund of any overpayment of tax resulting from the exclusion, even if such claim would be disallowed under the Code or by operation of any law or rule of law (including res judicata), if the claim for credit or refund is filed before the close of the one-year period beginning on the date of enactment of this Act.

Effective Date

The provision is effective for taxable years beginning before, on, or after the date of enactment of this Act.

[Footnote] 471 For example, a claim for lost wages results in taxable damages, because the wages themselves would have been taxable, but an award for damage to property may not result in includible income if the award does not exceed the recipient’s basis in the property.

   
   Source: Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of the Protecting Americans from Tax Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print 114-40), (JCX-144-15), December 17, 2015; pages 152-153. Available as a PDF download at https://www.jct.gov/publications.html?func=startdown&id=4861.