Are personal injury settlements taxable?

Under the general federal rule, compensatory damages received because of personal physical injuries or physical sickness are usually excluded from gross income. Punitive damages and interest are generally taxable. Damages for emotional distress that are not attributable to a physical injury may also be taxable, apart from qualifying medical-expense reimbursement, and prior deductions can affect the result.
Tax treatment turns on what each part of the payment was intended to replace and how the settlement documents allocate it. State tax rules and unusual claims may add complexity. Before signing a settlement or filing a return, ask a qualified tax professional to review the agreement and your specific circumstances.