Lawsuit Settlements – Individuals
- Interest is always taxable
- Punitive damages are taxable except in wrongful death claims
- Personal injury or sickness damages are not taxable, including damages for lost wages or earnings capacity caused by physical injury
| Award Type | Taxability | Attorney Fees | Subject to AMT |
| Personal Injury | Exempt | NA | NA |
| Civil Rights | Taxable | Pre-AGI | No |
| Punitive damages | Taxable | 2% Itemized | Yes |
| Contract Claims | Taxable | Business | NA |
| Slander/Defamation | Taxable | 2% Itemized | Yes |
| Backpay | Taxable | 2% Itemized | Yes |
| Class Action Award | Exempt if consumer | Pre-awarded | NA |
| Other awards | Taxable | 2% Itemized | Yes |
| Interest | Taxable | Depends on award | Maybe |
| Emotional Distress | Taxable * | NA | NA |
| Mental Anguish | Taxable * | NA | NA |
| Loss of reputation | Taxable * | NA | NA |
- In Murphy v IRS, No. 05-5139 (D.C Cir 8/22/06) an award of damages for mental anguish was held tax free, but reversed on appeal. Therefore awards for mental anguish, emotional distress or loss of reputation are taxable.
