Court Awards, Damages, and Legal
Settlements
These amounts can be taxable
or nontaxable, depending on the nature of the injury that they are
designed to compensate you for.
Compensatory damages received
for personal physical injury or physical sickness are not taxable.
Since emotional distress is not “physical,” the amounts
received for emotional distress are taxable. However, reimbursement
for the medical expenses to treat the distress are tax free.
The
following types of damages would be taxable as ordinary income:
- interest on any type of award
- compensation for lost wages or lost profits
- punitive damages
- amounts received to settle pension rights, if you did not contribute
to the plan
- compensation for patent or copyright infringement
- compensation for breach of contract
- compensation for interference with business operations
- back pay and damages for emotional distress in a Civil Rights
Act claim
- attorney fees and court costs in civil rights suits involving
a claim of unlawful discrimination, a claim against the federal government,
or a claim under the Medicare Secondary Payer provisions of the Social
Security Act.
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