To determine if settlement amounts you receive by compromise or judgment need to 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 income depends on the nature of the underlying claim. Include the following as ordinary income.

1. Interest on any award.
2. Compensation for lost wages or lost profits in most cases.
3. Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.
4. Amounts received in settlement of pension rights (if you did not contribute to the plan).
5. Damages for:
   1. Patent or copyright infringement,
   2. Breach of contract, or
   3. Interference with business operations.
6. Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
7. 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).

If you received a Form 1099-MISC from the payer of this income with an amount reported in Box 3:

1. From within your TaxAct® return (Online or Desktop) click on the Federal tab. On smaller devices, click in the upper left-hand corner, then choose Federal.
2. Click Form 1099-MISC to expand the category, then click 3 - Other income
3. Choose Form 1040 and click Continue
4. The program will proceed with the interview questions for you to enter the appropriate information

Related Links:

• IRS Publication 525