Do you pay taxes on money won in a law suit?

Answer 1

That depends on what the money you won is for. According to IRS Publication 17: Court awards and damages. To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income. # Interest on any award. # Compensation for lost wages or lost profits in most cases. # Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness. # Amounts received in settlement of pension rights (if you did not contribute to the plan). # Damages for ## Patent or copyright infringement, ## Breach of contract, or ## Interference with business operations. # Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964. # Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income. Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Emotional distress. Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Do not include them in your income. If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.

http://www.irs.gov/publications/p17/ch12.html#publink100033109