Awarded money in a lawsuit or settlement? It’s only tax-free in certain circumstances - Crawford Ellenbogen

You generally must pay federal tax on all income you receive but there are some exceptions. For example, compensatory awards and judgments for “personal physical injuries or physical sickness” are free from federal income tax under the tax code. This includes amounts received in a lawsuit or a settlement and in a lump sum or in installments. However, not all awards are tax-free. For example, punitive damages and awards for unlawful discrimination or harassment are taxable. And the tax code states that “emotional distress shall not be treated as a physical injury or physical sickness.” If you receive a court award or out-of-court settlement, consult with us about the tax implications.