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when are judgments taxable?
Answer

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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Answer

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.

No answer given yet!

Keeper Staff

Keeper is a delightfully smart tax filing software that's especially useful for people with 1099 contracting and freelance income. Our blog breaks down IRS guidance with real-world examples and analysis by tax professionals — empowering taxpayers to save money and take control of their finances.

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