These amounts can be taxable or nontaxable, depending on the nature of the injury that they are designed to compensate you for.
Compensatory damages for personal physical injury or physical sickness, and damages for emotional distress related to a physical injury or sickness, are not taxable. However, the following types of damages would be taxable as ordinary income:
- interest on any type of award
- compensation for lost wages or lost profits
- punitive damages
- amounts received to settle pension rights, if you did not contribute to the plan
- compensation for patent or copyright infringement
- compensation for breach of contract
- compensation for interference with business operations
- back pay and damages for emotional distress in a Civil Rights Act claim
- attorney fees and court costs in civil rights suits involving a claim of unlawful discrimination, a claim against the federal government, or a claim under the Medicare Secondary Payer provisions of the Social Security Act.