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when are judgments taxable?
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Great question! Whether a judgement or settlement is taxable depends on the specifics of the case. Generally, the IRS divides this income into three categories:

  1. Actual damages resulting in physical injuries. Compensation in these cases is generally excludable from income.
  2. Emotional and mental distress damages. These are usually taxable, unless they resulted on account of physical injures.
  3. Punitive damages. Compensation for punitive damages are taxable in most cases. This includes employment-related lawsuits as well as discrimination suits.

The IRS offers detailed instructions on how to determine what category your settlement might fall into. But as a general rule, if the payment is to compensate for economic loss, it’s most likely taxable.

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Sarah York, EA

Sarah is an Enrolled Agent with the IRS and has 6 years of tax and accounting experience. She's an avid hiker, animal lover, and self-proclaimed chocolate connoisseur.

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