Answer: It depends. Generally, lawsuit awards and settlements for physical injury or sickness are exempt from federal income tax, but awards and settlements for other torts (such as age discrimination cases, sexual harassment cases, etc.) and settlements for punitive damages are taxable. Compensation for emotional distress, above actual medical expenses, is taxable unless it is related to a physical injury or sickness settlement.
Tip: Be sure to review your case with a tax expert.
Like any good CPA, I need to add a disclaimer: Unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.