Lawsuit Settlements – Individuals

  1. Interest is always taxable
  2. Punitive damages are taxable except in wrongful death claims
  3. 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.