Settlement Tax Calculator

Not all settlement money is taxed the same. Damages for physical injuries are generally excluded from income, while lost wages, punitive damages, and interest are generally taxable. Allocate your settlement across the categories below and enter your marginal tax rates for an estimated federal and state tax bill. Runs entirely in your browser.

Physical injury / sickness damages Generally excluded IRC §104(a)(2) — excludes medical expenses you previously deducted

Previously deducted medical expenses Taxable Recovered medical costs you already deducted in a prior year

Lost wages / back pay Taxable Replaces wages you would have paid tax on

Emotional distress (no physical injury) Taxable Excluded only when it flows from physical injury or sickness

Punitive damages Taxable Always taxable as ordinary income, even in physical-injury cases

Pre- or post-judgment interest Taxable Interest on the award is interest income

Attorney fees paid out of the settlement Deduction varies Deductible above the line for some claim types (e.g. employment, civil rights); often not deductible otherwise — ask your tax pro

Marginal federal rate (%) Use your own, not the calculator's

Marginal state rate (%)

Are your attorney fees deductible?

Yes Not sure / No

Not tax advice. This is a simplified educational estimate based on general federal rules (primarily IRC §104). Your settlement agreement's allocation language, state law, claim type, and whether legal fees are deductible for your case can all change the result. Settlement taxation is one of the most common tax mistakes — always have a CPA or tax attorney review your allocation before you file.

Frequently Asked Questions

Is my lawsuit settlement taxable?

It depends on what the money is for. Damages received on account of personal physical injuries or physical sickness are generally excluded from gross income under IRC §104(a)(2). Damages for lost wages, emotional distress not tied to physical injury, punitive damages, and interest are generally taxable. The key is how the settlement is allocated — so the allocation language in your settlement agreement matters enormously.

Are emotional distress damages taxable?

Generally yes, unless they flow from a physical injury or sickness. If you settled a workplace dispute for emotional distress without any physical injury, that portion is taxable income. If the emotional distress stems from the same physical injuries that produced the settlement, it can be excluded along with them.

Are punitive damages taxable even if the injury was physical?

Yes. Punitive damages are always taxable as ordinary income, even when the underlying compensatory damages for physical injuries are excluded. Courts award them to punish the defendant, not to compensate you, and the IRS treats them accordingly.

Can I deduct my attorney fees from the settlement?

Sometimes. For certain claims — unlawful discrimination, whistleblower, and other employment or civil-rights claims — fees are deductible above the line, up to the amount recovered. For many other claim types, legal fees currently can't be deducted, which means you could owe tax on money that went straight to your lawyer. This is one of the costliest traps in settlement taxation — confirm with a tax pro.

Is settlement interest taxable?

Yes. Pre-judgment and post-judgment interest is taxed as interest income, even when it's attached to an otherwise tax-free physical-injury settlement. It is commonly reported on Form 1099-INT or 1099-MISC.

How should I allocate my settlement?

The IRS gives weight to the language of the settlement agreement when deciding what's excluded and what's taxable. Getting the allocation written into the agreement — with specific dollar amounts per category — is far stronger than allocating it yourself at tax time. Negotiate the tax treatment before you sign, not after.