Are damages taxable? It depends on the type of award.
● Recovery for lost wages or lost profits are taxable (because they are replacing taxable income).
● Breach of contract awards are taxable (because it's generally a loss of income)
● Personal injury awards are NOT taxable.
● Emotional distress awards are taxable (unless they arise from personal injuries).
● Medical expense awards are NOT taxable (as long as you did not take an itemized deduction for medical expenses related to the injury or sickness in a prior year)
● A payment for damaged or destroyed property is taxed as a capital gain if the money received exceeds the property’s cost (or "basis").
● The recovery of an expense is NOT income (unless the expense was deducted in a prior year, this is known as the "tax benefit rule").
● Punitive damages are taxable.
● Pre-judgment interest and post-judgment interest are taxable.