Is the money received from my settlement taxable?

Personal physical injuries or physical sickness

• If you receive a settlement for personal physical injuries or physical sickness, generally the full amount is non-taxable. Do not include the settlement proceeds in your income.

Emotional distress or mental anguish

• The proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or physical sickness, generally the full amount is non-taxable. Do not include the settlement proceeds in your income. However, if the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you generally must include them in your income on line 8z of Schedule 1 of Form 1040.

Punitive damages

• Punitive damages are taxable and should be reported as “Other Income” on line 8z of Schedule 1 of Form 1040, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.

Lost wages or lost profits

• If you receive a settlement in an employment-related lawsuit; for example, for unlawful discrimination or involuntary termination, the portion of the proceeds that is for lost wages (i.e., severance pay, back pay, front pay) is taxable wages and subject to the social security wage base and social security and Medicare tax rates in effect in the year paid. These proceeds are subject to employment tax withholding by the payor and should be reported by you as "Wages, salaries, tips, etc." on line 1a of Form 1040.
• If you receive a settlement for lost profits from your trade or business, the portion of the proceeds attributable to the carrying on of your trade or business is net earnings subject to self-employment tax. These proceeds are taxable and should be included in your “Business income” reported on line 1 of Schedule C (Form 1040). These proceeds are also included on line 2 of Schedule SE (Form 1040) when figuring self-employment tax.

Loss-in-value of property

• As a general rule, casualty insurance settlements are not taxable. As long as the check reimburses you for damage or loss of your property, you won't need to pay taxes on the insurance proceeds.