are court-ordered damages taxable?
Say part of your award or settlement is tax-free (for physical injury or sickness), and part is taxable (for interest or punitive damages). You must report the full amount of the taxable portion of the award or settlement as income on your return, without any reduction for the related attorney fees. Then you can treat the fees related to the taxable portion as a miscellaneous itemized deduction item on Form 1040.