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when are judgments taxable?

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 a staff writer at Keeper Tax and has her Enrolled Agent license with the IRS. Her work has been featured in Business Insider, Money Under 30, Best Life, GOBankingRates, and Shopify. She has nearly a decade of public accounting experience, and has worked with clients in a wide range of industries, including oil and gas, manufacturing, real estate, wholesale and retail, finance, and ecommerce. Sarah has extensive experience offering strategic tax planning at the state and federal level. During her time in industry, she handled tax returns for C Corps, S corps, partnerships, nonprofits, and sole proprietorships. Sarah is a member of the National Association of Enrolled Agents (NAEA) and maintains her continuing education requirements by completing over 30 hours of tax training every year. In her spare time, she is a devoted cat mom and enjoys hiking, baking, and overwatering her houseplants.

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