It depends upon the nature of the award. The Internal Revenue Service provides that compensatory damages for personal physical injuries are not taxable whether received in a lump sum or in installment payments over a period of time. Damages for emotional distress are not taxable if they are received for an underlying physical injury or sickness. However, if the emotional distress damages are not due to a physical sickness or illness then those damages are taxable.

Other forms of damages that are taxable include: interest on any award, compensation for lost wages and lost profits, and punitive damages in most cases even if the award relates to a physical sickness. For further information on this admittedly difficult subject, see Internal Revenue Service, “Publication No. 525—Taxable and Nontaxable Income,” at http://www.irs.gov/pub/irs-pdf/p525.pdf.