How Are Settlements Taxed?

Personal injury settlements in excess of actual physical damages may be taxable by the Internal Revenue Service. How the cash settlement is reported on your tax return is dependent on the type of settlement you receive.

Physical Injury

The amount up to the total of your medical bills is not taxed, provided you did not itemize your medical bills on this or prior returns. The balance is recorded as Other Income on line 21 of Form 1040.

Property

Awards for loss-of-use or loss-of-value of personal property in excess of your basis in the property is taxable and reported on Schedule D of Form 1040.

Interest

All interest awards are reported as Interest Income on line 8a on Form 1040.

Other Income

Injury to reputation, discrimination, punitive damages, emotional distress and mental anguish settlement awards are taxable and reported as Other Income on line 21 of Form 1040.

Estimated Payments

If the tax on your settlement will exceed $1,000, you may be required to make an estimated tax payment. IRS Publication 505 will provide you with more details.

References

• Settlement Award
• IRS: Settlements Taxability