Settlements are taxed or not according to the type of income they represent. For example, a settlement for unpaid wages is taxed like wages. Settlements for physical injury are not taxed. Settlements for emotional distress are not taxed if the emotional distress was related to a physical injury, but are taxed if the injury was purely emotional. Punitive damages and interest are taxable. A settlement for physical damages to property is taxable if it exceeds your original cost to purchase the property.
Settlements for physical injury are not taxed.
This IRS FAQ provides a good overview of this issue.
https://ttlc.intuit.com/turbotax-support/en-us/help-article/legal-issues/legal-settlements-taxable/L...
