1: Taxation of Settlements and Judgments Depends on Award Type
The US taxes all income, from whatever source, unless specifically excluded. However, certain awards received on account of personal physical injuries or physical sickness are generally excluded from income.
In general, dispute resolutions may have three types of awards; Actual, emotional and punitive damages, and the taxation of the types of awards will vary.
2: Actual Damages are Not Taxable
Actual damages from a personal injury claim are specifically excluded from income and not taxable.
3: Emotional Damages are Generally Taxable
For emotional damages it depends on if they are on account of another claim that also involved physical injuries. For example, an award for emotional distress, even with accompanying physical manifestations, resulting from harassment as a whistleblower, would not be excluded from income. However, an award for emotional distress resulting from a car accident that also resulted in physical injury would be excluded. Any punitive amounts received would also be included in income, and taxable.
4. Wrongful Death Settlements May be Taxable
Wrongful death awards are taxable in a similar manner. The amount of the award that compensates physical injury is excluded and the amount of the award that is punitive is taxable. However, some state statutes only allow punitive awards for wrongful death actions. In these cases, the courts have allowed the exclusion of punitive damages from taxation.