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Do
I have to pay tax to the IRS on my legal settlement or court award?
Whether
you have to pay tax to the IRS 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 IRS tax
free if on account of physical injury or physical sickness. Include the
following as ordinary taxable income on your IRS 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 IRS 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 IRS 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 IRS tax return.
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