This is the eighth in a series of articles on issues surrounding the Taxation of Settlements and Verdicts. The chart below summarizes the taxable nature of a variety of settlements and verdicts.

Damage Award

Taxable?

Exceptions

Relevant Case Law / Statute

Physical Injury / Illness

No

Taxable if not recovered for a tort or tort type right

IRC Section 104(a)(2)

Back Pay

Yes

Not Taxable if qualified under Section 104

Rev. Rul. 96-65

Front Pay

Yes

Not Taxable if qualified under Section 104

Rev. Rul. 96-65

Emotional Distress

Yes

Not Taxable if qualified under Section 104

IRC Section 104(a)(2)

Medical Reimbursement

No

Taxable if already deducted

IRC Section 213

Medical Insurance Reimbursement

No

Taxable if already deducted

IRC Section 213

Pre Judgment Interest

Yes

 

IRS Section 61(a)(4) Rozpad v. Commissioner 154 F.3d 1 (1st Cir. 1998)

Post Judgment Interest

Yes

 

IRS Section 61(a)(4) Rozpad v. Commissioner 154 F.3d 1 (1st Cir. 1998)

Wrongful Refusal to Hire

Yes

 

IRC Section 61

Balance of Contract

Yes

 

IRC Section 61

Liquidated Damages

Yes

 

IRC Section 61

Reimbursement for Deductible for Losses

Yes

Not taxable if not previously deducted

IRC Section 61

Punitive

Yes

 

Ogilivie v. United States, 519 U.S. 79 (1996); IRC Section 104(a)(2)

Discrimination

Yes

 

Commissioner v. Schleier, 515 U.S. 323 (1995); Rev. Rul. 96-95

Defamation

Yes

 

IRC Section 104(a)(2)