Whether and how much of the amount of a legal settlement is taxable depends on the type of settlement proceeds you received and what they represented.
Check the terms of the legal settlement. If you received any punitive damages, this would be taxable income.
If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.
Property settlements that compensate for a loss in value of your property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement. If the property settlement exceeds your adjusted basis in the property, the excess is income.
See this help article for instructions for entering a legal settlement in TurboTax.
See IRS Publication 4345 for more information about legal settlements.
The full amount of any taxable settlement would be reported as taxable income Legal fees related to personal issues typically can't be included in your itemized deductions under current law or deducted from taxable settlements. See this tax tips article for more information.
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