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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:
- Actual damages resulting in physical injuries. Compensation in these cases is generally excludable from income.
- Emotional and mental distress damages. These are usually taxable, unless they resulted on account of physical injures.
- 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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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:
- Actual damages resulting in physical injuries. Compensation in these cases is generally excludable from income.
- Emotional and mental distress damages. These are usually taxable, unless they resulted on account of physical injures.
- 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!
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