Settlement Tax Calculator
Whether a lawsuit settlement is taxable depends on what each part of it pays for. Damages for a physical injury are treated one way, and punitive damages, interest and some other parts another. This page quotes the federal statute and the IRS publication that say which is which, and the calculator below sorts the parts of your settlement by them.
The IRS puts the starting point this way: “Whether you must include the settlement proceeds in your income depends on all the facts and circumstances in your case.” (IRS Publication 4345 (Rev. 9-2023))
Which parts of your settlement count as income
Enter how your settlement is divided. The calculator sorts each part into what the federal rules quoted on this page say is not included in income and what they say is included. It does not compute any tax.
Everything paid on account of the physical injury: medical bills, lost wages from being hurt, pain and suffering, and emotional distress that comes from the physical injury. Leave out punitive damages and interest.
The part paying back medical expenses you took as an itemized deduction on an earlier return, to the extent the deduction lowered your tax. Leave at 0 if you did not deduct them.
Emotional distress or mental anguish that did not come from a physical injury or physical sickness, as in some employment or defamation claims.
The part paying for treatment of that distress, where you did not deduct the expense before or the deduction gave no tax benefit.
Back pay, front pay or severance in an employment-related claim, such as unlawful discrimination or termination. Wages lost because of a physical injury belong in the first line.
Damages meant to punish, not to compensate.
Interest paid on the amount, for example for the time between a judgment and payment.
How the federal rules quoted below sort what you entered
Enter an amount to see how it is sorted.
This sorts the amounts you enter by the federal income-tax rules quoted on this page. It is not tax advice, it does not decide how a settlement is divided, and it applies no rate, so it does not say what tax you owe. A tax professional can tell you how the rules apply to your settlement and whether state tax applies.
Are lawsuit settlements taxable?
Some parts are and some are not. The federal rule that excludes injury damages from income is 26 U.S.C. § 104. Its first subsection opens: “Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include” (26 U.S.C. § 104(a)), and it then lists what is excluded. The second item on the list is the one an injury settlement turns on: “(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;” (26 U.S.C. § 104(a)(2))
Two parts of that sentence decide the questions on this page. It reaches damages received on account of a physical injury or a physical sickness, and it leaves out punitive damages. The rest of this page takes each kind of payment in turn, and the calculator above applies the same sorting to the amounts you enter.
The same list also excludes “(1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness;” (26 U.S.C. § 104(a)(1)) Workers' compensation benefits are a separate claim from an injury lawsuit, and this site has a separate calculator for them.
Is a personal injury settlement taxable?
For a physical injury, the IRS says: “If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable.” (IRS Publication 4345 (Rev. 9-2023))
There is one exception for medical expenses you already deducted: “If you receive a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit.” (IRS Publication 4345 (Rev. 9-2023)) That is the exception the statute's opening words make, for amounts attributable to deductions allowed under section 213 for a prior year. The calculator asks for that part separately and counts it as included.
Emotional distress that comes from the physical injury is not a separate category: “The proceeds you receive for emotional distress or mental anguish attributable to a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness above.” (IRS Publication 4345 (Rev. 9-2023)) In the calculator it belongs in the physical-injury line.
The statute's words cover damages "whether by suit or agreement and whether as lump sums or as periodic payments", so the rule reaches damages paid under a settlement or a judgment, at once or over time, as in a structured settlement.
Emotional distress without a physical injury
Section 104 says this about emotional distress: “For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness. The preceding sentence shall not apply to an amount of damages not in excess of the amount paid for medical care (described in subparagraph (A) or (B) of section 213(d)(1)) attributable to emotional distress.” (26 U.S.C. § 104(a))
The IRS applies it this way: “If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income. However, the amount you must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit.” (IRS Publication 4345 (Rev. 9-2023))
The calculator takes two amounts for this: the emotional-distress damages, and the part of them that pays for treating the distress where you did not deduct it before, or the deduction gave no tax benefit. The first, less the second, is counted as included.
Punitive damages and interest
The IRS says: “Punitive damages are taxable” (IRS Publication 4345 (Rev. 9-2023)), “even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.” (IRS Publication 4345 (Rev. 9-2023)) That follows from the words "(other than punitive damages)" in § 104(a)(2), quoted above.
On interest: “Interest on any settlement is generally taxable” (IRS Publication 4345 (Rev. 9-2023)) Interest can be paid on a judgment, or under a settlement agreement, for the time before payment. The calculator counts any interest you enter as included.
Punitive damages in a wrongful-death case
Section 104 has one exception for punitive damages, in its subsection (c): “The phrase "(other than punitive damages)" shall not apply to punitive damages awarded in a civil action” (26 U.S.C. § 104(c)) that is “(1) which is a wrongful death action, and (2) with respect to which applicable State law (as in effect on September 13, 1995 and without regard to any modification after such date) provides, or has been construed to provide by a court of competent jurisdiction pursuant to a decision issued on or before September 13, 1995, that only punitive damages may be awarded in such an action.” (26 U.S.C. § 104(c))
Which states' law met that condition on September 13, 1995 was not read for this page, so the calculator does not apply the exception. If punitive damages were awarded in a wrongful-death case, ask a tax professional whether it reaches them.
Lost wages
Lost wages are treated by what the claim was for. Wages lost because of a physical injury are part of the damages received on account of that injury, so the calculator counts them in the physical-injury line.
For an employment claim the IRS says: “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.” (IRS Publication 4345 (Rev. 9-2023))
How a settlement is divided matters
A settlement agreement can say how the total is divided among the claims it resolves, and the IRS says: “Generally, the IRS will not disturb an allocation if it is consistent with the substance of the settled claims.” (IRS Publication 4345 (Rev. 9-2023))
Keep the signed agreement, and any document that shows what each part of the payment was for: medical bills, lost pay, the injury itself, any punitive amount, any interest. The calculator cannot decide the division. It sorts the amounts you enter.
What this settlement tax calculator does not do
It does not compute tax. It applies no rate and no bracket, so it cannot say what you will owe, and it does not cover state income tax.
It does not say how attorney fees are treated when part of a settlement is included in income, and it does not name the form or line a part is reported on, because those change from year to year. A tax professional can answer both for your return.
It sorts by the rules quoted on this page, from the 2024 edition of the United States Code and IRS Publication 4345 (Rev. 9-2023). A later change to either is not reflected here until this page is updated.