Is the money received from a settlement taxable?
• A: To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item which the settlement replaces. Include the following as ordinary income: • Interest on any award • Compensation for lost wages or lost profits in most cases • Punitive damages. (But see below) • Amounts received in settlement of pension rights (if you did not contribute to the plan) • Damages for • Patent or copyright infringement • Breach of contract • Interference with business operations • Any recovery under the Age Discrimination in Employment Act • Damages to your character • Alienation of affection Don’t include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments). Damages for emotional distress due to a physical injury or sickness aren’t taxable.
