That depends on what makes up the settlement.
The part of the settlement that covers economic losses you suffered, such as medical expense, burial, funeral, and loss of earnings and financial support, are not taxable to you by the Federal government. You will need to check with your state as to whether or not such compensation is taxable by them.
IF you took tax deductions on your tax return for any of the expenses above that would be considered tax deductible, those amounts will be taxable income.
For the rest of the settlement that is not covering economic losses – awards that are to compensate for other losses suffered - are taxable income to the recipient.
Those amounts include:
For information on how to enter taxable settlements, please look at the information below:
This is not actually correct. If you suffer from emotional pain or suffering that results from a physical injury then compensation for that emotional pain and suffering would likely not be taxable. At the same time if you suffer from physical symptoms (headaches, stomach ulcers, etc.) that result from an emotional injury, then compensation for those physical symptoms would likely be taxable. The key is whether the damages (other than punitives) "flow from" a physical injury.
"The House Committee Report to the 1996 Act (excerpts attached as Appendix A) states:
If an action has its origin in a physical injury or physical sickness, then all damages (other than
punitive) that flow therefrom are treated as payments received on account of physical injury or
physical sickness whether or not the recipient of the damages is the injured party. For example,
damages (other than punitive) received by an individual on account of a claim for loss of
consortium due to the physical injury or physical sickness of such individual?s spouse are
excludable from gross income."
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf">https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf</a>
The bottom line is that if you have a personal injury/wrongful death settlement, I would consult with a tax attorney knowledgeable in this particular field.