TurboTax FAQ
TurboTax FAQ
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Are legal settlements taxable?

They often are, but that depends upon the type of settlement, which is listed on the Final Settlement Agreement.

Physical injury or sickness settlements (for example, awards related to animal bites) are non-taxable and don't need to be reported unless you deducted medical expenses related to the injury on a previous tax return and you received a tax benefit from the deduction. In that case, you'd report the medical expenses related to the incident as miscellaneous (other) income.

Punitive damages are taxable except in certain wrongful death cases, as are awards for employment discrimination and injury to reputation (libel, slander, defamation, etc.).

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.

Interest earned on settlements is taxable and should be entered as you would a Form 1099-INT.