Q:

What is settlement taxable income?

A:

Quick Answer

Settlements arising from physical injury are generally non-taxable, according to Nolo. Punitive damages, interest on the judgment, and settlements not related to physical injuries are usually taxable.

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Full Answer

In some cases, the settlement portion is partially taxable, explains AllLaw. If a plaintiff receives a settlement for which half of the award is for physical injury and the remaining half for emotional distress, only the amount awarded for emotional distress is taxable.

Punitive damages, money awarded beyond ordinary compensation to punish the defendant, are always taxable, states Nolo. The plaintiff's attorney should ask for a separate verdict showing which part of the award is compensatory and what is punitive. This shows the Internal Revenue Service how much of the award is taxable.

If the settlement is taxable, the gross settlement amount must be reported in the taxpayer's income, according to the Internal Revenue Service. The taxpayer is usually able to deduct reasonable attorney's fees for taxable settlements.

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