Do I have to pay tax on my legal settlement or court award?

Whether you have to pay tax on the court award or legal settlement depends on what it is for.

After August 20, 1996 a legal settlement or court award received is only tax free if on account of physical injury or physical sickness. Include the following as ordinary taxable income on your tax return:

	Interest on any legal settlement or court award;
	Compensation for lost wages or lost profits in most cases;
	Punitive damages;
	Amounts received in a legal settlement or court award of pension rights (if you did not contribute to the plan);
	Damages for: Patent or copyright infringement; Breach of contract; Interference with business operations;
	Any legal settlement or court award under the Age Discrimination in Employment Act.

Do not include in your taxable income on your tax return a legal settlement or court award for compensatory damages for personal physical injury or physical sickness.

Emotional distress is not considered a physical injury or sickness; therefore, a legal settlement or court award for emotional distress is includable in taxable income on your tax return. However, a legal settlement or court award up to the amount paid for medical care expenses attributable to emotional distress are tax free and do not need to be included on your tax return.

Related tax information about a legal settlement or court award

Tax Directory Topics:
Legal Fees
Are back pay awards taxable?
Are damages received for emotional distress taxable?
Income Related Questions and Answers

IRS publications about a legal settlements or court award:
For additional tax information about a legal settlement or court award, refer to Chapter 13 of IRS Publication 17,

Your Federal Income Tax. Please read this IMPORTANT Editor's Note regarding navigating IRS publications with Adobe Acrobat Reader.
IRS publications can also be ordered by calling 1-800-829-3676.

Customer Support

Still have IRS or tax questions?
To view the alphabetical Master Index of all tax and IRS topics click here.

Ask Julian Block your IRS and tax questions!

If you can't find the answer to your IRS or tax question in our web you can call former IRS Special Agent and one of the country's foremost tax attorneys, nationally syndicated columnist ("The Tax Adviser") Julian Block. Julian is also the tax Editor of Mutual Funds Magazine, America's premier investment magazine.

To call Julian for a tax consultation click here.

Prepare your IRS tax return and State tax return online - If you'd like to e-file and/or print your IRS tax return or State tax return online click here.