How to Report Court Awards

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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 does not matter if they relate to a physical injury or physical sickness. Punitive damages represent compensation in excess of actual (compensatory) damages; they are a form of punishment to the wrongdoer.
4. Amounts received in settlement of pension rights (if you did not contribute to the plan)
5. Damages for a patent or copyright infringement, breach of contract, or 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. Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments). Compensatory damages represent actual damages directly referrable to the breach or tortious act; a monetary amount that replaces what was lost