I received a settlement in a lawsuit for emotional distress. Do I enter it on my taxes?
That depends on the nature of your claim. According to the IRS, the settlement is not taxable if:
The proceeds you receive for emotional distress or mental anguish originating from a personal physical
injury or physical sickness are treated the same as proceeds received for Personal physical injuries or
physical sickness above.
BUT
If the proceeds you receive for emotional distress or mental anguish do not originate from a personal
physical injury or physical sickness, you must include them in your income. However, the amount you
must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress
or mental anguish not previously deducted and (2) previously deducted medical expenses for such
distress and anguish that did not provide a tax benefit. Attach to your return a statement showing
the entire settlement amount less related medical costs not previously deducted and medical costs
deducted for which there was no tax benefit.
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