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:
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 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.