Are Lawsuit or Accident Settlements Taxable?

Settlements to compensate you for physical injuries or sickness suffered in an accident are tax-free. So is the amount paid to compensate you for loss of your car, or medical expenses, except to the extent that those expenses were deducted in an earlier year and provided a tax benefit.

Punitive damages awarded in a lawsuit, and any damages award for non-physical injuries, are generally taxable.