Originally Posted by JudyKayTee
Here is the IRS Law - you must also check your State's law.
Your Attorney has the ability to word the settlement in a way that will reduce the tax liability.
"The type of settlement you receive is determined by your Final Settlement Agreement.
Physical injuries or physical sickness settlements are generally non-taxable. IF you receive a settlement for physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to this injury in prior years, the full amount is non-taxable and generally does not need to be reported on your income tax return.
BUT
If you receive a settlement for physical injuries or physical sickness and did deduct medical expenses related to the injury, the tax benefit amount is taxable and should be reported as “Other Income” on line 21 of Form 1040.
Interest, punitive damages, emotional distress or mental anguish, and employment
discrimination or injury to reputation settlements are generally taxable.
Interest: Amounts on any settlement are taxable as “Interest Income” and should be reported on line 8a of Form 1040.
Punitive Damages: Amounts are taxable and should be reported as “Other Income” on line
21 of Form 1040. It does not matter if punitive damages are related to a physical injury or
physical sickness. Emotional distress or mental anguish: Amounts are taxable to the extent that they exceed medical costs, not previously deducted, for treatment of emotional distress or mental anguish. A statement showing the entire settlement amount less related medical costs should be attached to the return. The net taxable amount should be reported as “Other Income” on line 21 of Form 1040."
