Court Awards and Damages

Per IRS Publication 525 Taxable and Nontaxable Income, page 30:

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.

  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. 
  8. Attorney fees and costs relating to whistleblower awards where the underlying recovery is included in gross income.

Don’t 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 Federal. On smaller devices, click in the upper left-hand corner, then choose Federal.
  2. Click Form 1099-MISC and then click +Add Form 1099-MISC to add a new copy of the form
  3. Click the button for Form 1099-MISC Quick Entry. Enter the appropriate information and then Save and Close the form.
  4. In the Assigned schedule or form dropdown, choose Form 1040/1040NR, Other Income.

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