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According to the IRS, any lawsuit settlement proceeds that a court awards for physical illness or injury are non-taxable. This includes wrongful death settlements, since the damages are imposed due to a court’s finding that a third party is responsible for the physical illness or injury that resulted in death.
To qualify for this exception, the settlement must be compensatory, meaning that it must be a form of compensation for the pain and suffering caused in the case.
Compensatory proceeds are non-taxable, but if there are any additional proceeds that are awarded such as punitive damages, payments for emotional distress, or awards for lost wages, those payments are considered income and are subject to income tax
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