Punitive damages are taxable and are reported as "Other Income" on line 21 of Form 1040. By way of contrast, a settlement for physical injury or physical sickness is generally not taxable, except for that portion (if any) of the settlement that you deducted for medical expenses in prior years. A settlement for emotional distress or mental anguish is generally not taxable. However, if the proceeds don't originate from a personal physical injury or physical sickness, then you'll have to include it in taxable income. Settlements like these often have different components which may be treated differently for tax purposes. For more info, here's a helpful two-page summary from the IRS.
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