Do I have to pay tax on my legal settlement or court award?
Whether you have to
pay tax on the court award or
legal settlement depends on what it is for.
After August 20,
1996 a legal settlement or court award received is only tax free if on account of physical injury or physical
sickness. Include the following as ordinary taxable income on your tax
Interest on any
legal settlement or court award;
Compensation for lost wages or lost profits in most cases;
Amounts received in
a legal settlement or court award of pension rights
(if you did not contribute to the plan);
Patent or copyright infringement;
Breach of contract;
Interference with business operations;
settlement or court award under the Age Discrimination in Employment Act.
Do not include in your
taxable income on your tax return a legal settlement or court award for compensatory damages for personal physical injury or
Emotional distress is not considered a physical injury or sickness; therefore,
a legal settlement or court award for emotional distress is includable in
taxable income on your tax return. However, a legal settlement or court
award up to the amount paid for medical care expenses attributable to emotional distress are tax
free and do not need to be included on your tax return.
information about a legal settlement or court award
IRS publications about a legal settlements or court award: For additional tax information about a legal settlement or
court award, refer to Chapter 13 of
IRS Publication 17, Your Federal
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For further information regarding IRS
rules and regulations and your particular tax or IRS situation you should
consult with a Certified Public Accountant, Enrolled Agent, Attorney, or
other tax advisor.