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Per IRS Publication 525 Taxable and Nontaxable Income, on 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 doesn't matter if they relate to a physical injury or physical sickness.
  4. Amounts received in settlement of pension rights (if you didn't contribute to the plan).
  5. Damages for:
    a. Patent or copyright infringement,
    b. Breach of contract, or
    c. 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 Miscellaneous Income 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 click Federal.
  2. Click Form 1099-MISC, click + Add Form 1099-MISC to create a new copy of the form, then click Continue until you reach the screen titled 1099-MISC: Enter information on form.
  3. Click the Switch to Form Entry (optional) link near the top to open the Quick Entry window.
  4. Enter all of the applicable information from your Form 1099-MISC (including Box 3), then save and close the window.
  5. Click Other non-business income, click I confirm that the income reported on this Form 1099-MISC is non-business income and is not subject to self-employment taxes, then click Continue.
  6. An "Form 1040/1040NR, Other Income" item should appear in the screen titled Review 1099-MISC, if not, you should select "Form 1040/1040NR, Other Income" from the Assigned schedule or form drop-down.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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