You will not need to pay tax on damages awards arising from physical injuries or illnesses. In other words, awards in most personal injury cases will not be taxed. However, awards in other civil cases are taxable, such as damages in a breach of contract case or lost income in an employment discrimination case. Punitive damages, which are damages that go beyond compensatory damages to punish a defendant, are generally taxable as well. Since a judgment counts as income in most cases, you also may rise to a higher tax bracket. As a result, your tax obligations may increase overall.