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If this was structured as a personal injury suit for them violating your privacy rights, then any damages or settlement you receive to compensate you for your pain, suffering, and emotional distress is taxable according to the IRS.
With the exception of amounts paid to treat emotional distress, damages received after August 20, 1996, are excludable under IRC § 104(a)(2) only if received on account of physical injury or physical sickness. Therefore, a taxpayer receiving lawsuit proceeds from a non-physical injury claim cannot exclude any amount for payment to compensate for an intangible emotional distress value.
Basically any "non-physical" injury award is considered taxable by the IRS since 1996.
Yes they are to be informed of any income that comes in.
To further clarify, is your husband receiving regular social security disability benefits (sometimes called DIB) or low income disability benefits, commonly referred to as s SSI. If he gets SSI, then the settlement will have a direct impact on his SSI cash benefit. It will be treated as an asset in the month received and every month thereafter until spent down. If he gets SSI, you will need specific advice from an accountant.
Also if your husband is receiving a DIB and the settlement is for Worker's Compensation, there is also an off-set provision, which depends on your states law and income, and again you should seek advice of an accountant to review your income and filing requirements. . I hope this helps.