The IRS has provided some guidance on this issue, but it all comes down to what the settlement covers. If the settlement is intended to cover 'physical injuries or physical sickness,' then the award will not be taxable as income, as long as you didn't previously claim any 'medical expense' deductions related to that same injury or illness. Assuming you didn't claim such a deduction, you don't need to claim any part of the settlement as income for federal income tax purposes. But if you did claim a deduction involving the same injury or illness that gave rise to the settlement, then you'll most likely need to report the settlement as 'Other Income' to the IRS. There are a few more quirky rules when it comes to settlements and whether they're taxable: Any portion of your settlement that is meant as an interest payment is taxable. Any portion of the settlement that is meant to compensate you for pain and suffering -- above and beyond any dollar amount meant to cover your actual medical expenses -- will be taxable. Any punitive damages included in the settlement will be taxable. See: Tax Liability on a Personal Injury Settlement