A recent court case supported the definitive answer on what happens when you win a lawsuit and wonder if it’s taxable. The answer? Are you ready? … IT DEPENDS!
If you are awarded a settlement because of a physical injury or illness, the proceeds are not taxable. In a recent court case, an individual was fired from her job and filed a suit against her employer that resulted in a lump-sum settlement. The individual failed to include the settlement amount in her gross income despite having received a Form 1099-MISC, Miscellaneous Income, from her former employer. The individual’s argument was that the funds were compensation for emotional distress and, therefore, excludable from her gross income.
The Court said “no way” because damages for emotional distress no longer qualify for exclusion as medical compensation. In this case, the amount awarded was taxable.