Settlement Tax Calculator
Estimate federal and state tax on a lawsuit settlement. The taxability depends on what the settlement compensates — personal physical injury is often tax-free; lost wages, discrimination, and punitive damages are taxable.
Settlement type quick reference
| Settlement type | Federal tax | Attorney fee deductible? |
|---|---|---|
| Personal physical injury | Tax-free | N/A (no tax) |
| Pre-existing emotional distress | Fully taxable | No (since TCJA) |
| Lost wages / back pay | Fully taxable + FICA | Only if discrimination |
| Discrimination / wrongful termination | Fully taxable | Yes — above-the-line |
| Punitive damages | Always taxable | No |
| Interest on settlement | Taxable | No |
This is a simplified estimator — settlement tax has many edge cases. Consult a CPA or tax attorney for any settlement above $50,000.
FAQs
Are lawsuit settlements taxable?
It depends on what the settlement is for. Personal physical injury or sickness: generally NOT taxable (IRC §104). Emotional distress (without physical injury): taxable. Lost wages: taxable. Punitive damages: ALWAYS taxable. Discrimination/employment: taxable but attorney fees deductible above-the-line. Settlement allocations matter — your attorney should structure the settlement to maximize tax-free portion.
Is a personal injury settlement tax-free?
Yes, the portion compensating for physical injury, physical sickness, or medical expenses is excluded from gross income under IRC §104(a)(2). This includes pain and suffering directly tied to physical injury. However, interest on the settlement, punitive damages, and pre-existing emotional distress payments may be taxable.
Are discrimination settlements taxable?
Yes — discrimination, wrongful termination, and most employment-related settlements are taxable income. The good news: attorney fees in discrimination cases are deductible above-the-line under IRC §62(a)(20), so you only pay tax on net (after attorney fee) settlement. Without this rule, you'd pay tax on money paid directly to your attorney.
Are punitive damages always taxable?
Yes — punitive damages are ALWAYS taxable as ordinary income, regardless of the underlying claim. Even if compensatory damages from a physical injury case are tax-free, the punitive portion is fully taxable. Settlement allocations should clearly separate these components.
How is settlement income reported?
Taxable portions are typically reported on a 1099-MISC (Box 3 — Other Income) sent by the payer. You report this on Schedule 1 of Form 1040. Tax is owed at your marginal rate. Withholding is generally NOT taken from settlements, so you may need quarterly estimated payments to avoid underpayment penalties.
Does state tax apply to settlements?
Yes — most states follow federal rules. Personal injury settlements are typically exempt at both federal and state level. Discrimination, lost wages, and punitive damages are taxable at both. Nine states have no income tax (AK, FL, NV, NH, SD, TN, TX, WA, WY) — settlement is tax-free at state level there regardless.
Can I deduct attorney fees from my settlement?
Generally yes for the case categories where Congress has explicitly allowed above-the-line deduction: discrimination (IRC §62(a)(20)), whistleblower (IRC §62(a)(21)), and certain civil rights cases. For most other taxable settlements, attorney fees are NOT deductible since TCJA suspended the 2% miscellaneous deduction. This creates phantom income — you pay tax on money paid to your attorney.
Is interest on a settlement taxable?
Yes. If the settlement includes interest (delayed payment, pre-judgment interest, court-ordered interest), the interest portion is taxable as ordinary income — even if the underlying settlement was tax-free. Report on Schedule B (Interest Income).