Court Awards, Damages, and Legal Settlements

These amounts are either taxable or nontaxable, depending on the nature of the injury that they are designed to compensate you for.

Compensatory damages for personal physical injury or physical sickness are not taxable. However, the following types of damages would be taxable as ordinary income:

• interest on any type of award
• compensation for lost wages or lost profits
• punitive damages
• amounts received to settle pension rights, if you did not contribute to the plan
• compensation for patent or copyright infringement
• compensation for breach of contract
• compensation for interference with business operations
• back pay and damages for emotional distress in a Civil Rights Act claim.

Did You Know? The American Jobs Creation Act of 2004 provides a new above-the-line deduction for attorneys' fees and court costs paid after October 22, 2004, in civil rights suits. The suits must involve a claim of unlawful discrimination, a claim against the federal government, or a claim under the Medicare Secondary Payer provisions of the Social Security Act. The deduction is claimed on Line 36 of Form 1040.