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.
IRS Source: https://www.irs.gov/pub/irs-pdf/p4345.pdf
Punitive damages are taxable except in certain wrongful death cases, as are awards for employment discrimination and injury to reputation (libel, slander, or defamation).
Emotional distress and mental anguish settlements are taxable, but only on the amount above and beyond the undeducted medical costs for treatment of the distress or anguish. You'll need to paper-file your return so you can attach a statement that shows the settlement amount minus the (undeducted) medical expenses related to treatment.
Any interest earned on a settlement is taxable and should be entered as though you received Form 1099-INT.
Source: https://ttlc.intuit.com/community/income/help/are-legal-settlements-taxable/00/26607
IRS source Pub 525: https://www.irs.gov/pub/irs-pdf/p525.pdf
https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments
If you received a Form 1099, you will have to report the information on your tax return, even though the full amount may not be taxable.
Source: https://ttlc.intuit.com/community/entering-importing/help/where-do-i-enter-an-award-from-a-taxable-l...
California law conforms to federal law in this area.
Source: https://www.ftb.ca.gov/tax-pros/law/conformity.html
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