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Per the Master Tax Guide and IRS Code:
Damages (other than punitive damages) that compensate an injured person for personal injuries or physical sickness are excludable from gross income (Code Sec. 104(a)(2). Damages received for personal nonphysical injuries, such as employment discrimination or injury to reputation, are generally taxable. Interest on a judgment, including mandatory prejudgment interest, is generally includible in income.
Attorney Fees and Court Costs and attorney fees paid in connection with an action based on unlawful discrimination under federal law (as well as certain other claims, such as whistle blowing actions) are deductible from the determination of adjusted gross income.