Whether your class action settlement is taxable depends entirely on what the lawsuit was compensating you for. The rules are well established by the IRS but routinely misunderstood. This is general information, not tax advice — talk to a CPA for your specific situation.
Generally NOT taxable
- Compensation for physical injury or physical sickness (IRC §104(a)(2))
- Return of money you already paid (refunds and rebates) — it's your own money back
- Reimbursement of medical expenses you didn't deduct in a prior year
Generally taxable
- Lost wages, lost profits, or back pay — taxed as ordinary income
- Interest paid on the settlement amount — taxed as interest income
- Punitive damages — almost always taxable
- Emotional distress damages not tied to a physical injury
The 1099 you receive
If your settlement exceeds $600 the administrator will issue a 1099-MISC (or sometimes 1099-INT for interest). Box 3 ('Other income') is the most common. Match the amount on Schedule 1, Line 8z of your 1040.
If you didn't receive a 1099
You're still required to report taxable settlement income, even if no form was issued. The IRS receives administrator filings regardless.
Attorney's fees
In most class actions, fees come out of the gross fund before you receive anything, so you only pay tax on what you actually got. In some cases (especially employment) you're taxed on the gross award and have to deduct the fees separately — confirm with the settlement notice.