Are Class Action Lawsuit Payouts Taxable?
One of the most common questions we hear from class action members who receive a settlement is, “Are class action lawsuit payouts taxable?” The answer depends on the types of damages you receive. Some portions of your settlement may be non-taxable, but key exceptions, such as lost wages, punitive damages, and settlement interest, may be taxable.

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The total amount of your payment and the types of damages you receive are determined through settlement negotiation or a trial verdict. Both the amount and the type of damages vary depending on the facts of your case and the severity of the harm you suffered.
Are Class Action Lawsuit Settlements Subject to Taxation?
Compensatory damages from class action lawsuits are generally considered non-taxable if they can be tied to an injury. However, there are certain forms of damages that are subject to taxation. Specific laws on taxation of settlement payouts also vary by state, so it’s important to check with an attorney in your area to discuss the tax implications of your class action settlement.
What Types of Damages Are Awarded in Class Action Lawsuits?
There are a few types of damages available in class action lawsuits: economic damages, non-economic damages, and punitive damages. These differ based on the nature of the physical, emotional, or financial injuries that you suffered.
Economic Damages
Economic damages compensate for financial losses you suffered as a result of an injury. These may include medical bills, lost wages, property damage, and similar costs. These damages are meant to make you “financially whole” after losing money due to someone else’s actions.
Non-Economic Damages
Non-economic damages cover non-financial losses, such as physical pain and suffering, grief, and loss of companionship. These damages do not restore any money that you lost but rather attempt to compensate for the intangible, non-financial impact of what you went through.
Punitive Damages
Punitive damages are rarer than economic and noneconomic damages. They are awarded when a defendant acted maliciously or with reckless disregard for the safety of others. They are deliberately set high—sometimes in the millions of dollars—to punish and deter the defendant from harming others in the future.
Are All Class Action Settlements Taxable?
Whether your class action settlement is taxable depends on the circumstances of your case and the types of damages you are awarded. Some forms of settlement income are non-taxable, but there are key exceptions to keep in mind. Always consult an attorney to make sure you understand federal and state settlement taxation laws that can impact your case.
Non-Taxable Settlement Income
Some forms of economic damages, such as money for medical bills and property damage, are non-taxable. This is because economic damages are meant to restore money you had and lost, not new income. Non-economic damages that are connected to physical injuries, such as pain and suffering damages, are also generally non-taxable.
Taxable Settlement Income
Forms of settlement income that may be taxable include:
- Lost wages – Lost wages are taxed as regular income. This is because they are considered new income rather than compensation for a financial loss.
- Punitive damages – Punitive damages are always taxable because they do not compensate for a loss but are instead awarded to punish and deter the defendant. Accordingly, punitive damages are considered new income.
- Non-economic damages not related to physical injury – Non-economic damages connected to your injury are not taxed as income because they are meant to restore the plaintiff to their pre-injury condition, not provide a financial gain.
- Interest earned on settlement payments – If you earn interest on your settlement payout, that interest is taxable as income. This is because it is not part of the original financial restitution from the settlement but rather additional earnings on top of the compensated amount.
Federal Tax Reporting Requirements
Since some types of damages and settlement-related income are taxable, you can generally expect to receive tax documentation when you receive a settlement payout.
What Is Form 1099-MISC?
Form 1099-MISC is sent by people or organizations that pay money other than wages to non-employees. You may receive a 1099-MISC form if you received more than $600 in taxable damages as part of your settlement (e.g., punitive damages or compensation for emotional distress without physical injury). However, interest earned from a settlement is usually reported on Form 1099-INT.
Talk to talk to a class action attorney or tax professional about reporting any 1099 income to ensure that you file everything correctly.
What Can I Do if I Don't Receive a Tax Form?
Even if you don’t receive these tax forms, you are still required to accurately report any taxable income you receive as part of your settlement. If you didn’t get 1099 forms or other relevant documentation, review your settlement agreement with an attorney to determine exactly how much of your settlement income is taxable.
What Happens if I Fail To Report Taxable Settlement Income?
Failing to report taxable settlement income can result in IRS audits, financial penalties, and legal consequences. The IRS may impose fines, interest, or additional taxes on unreported income. It’s critical to discuss your settlement with a class action attorney, tax attorney, or professional tax preparer to ensure it is accurately reported when filing taxes.
Connect With an Attorney To Discuss the Status of Your Settlement
Whether your class action settlement is taxable depends on the types of damages you receive. Seeking guidance from an experienced class action lawyer is always in your best interest.
At Class Action U, we provide important information and resources related to filing a new class action or joining an existing class action. We connect clients with skilled class action attorneys nationwide who can help you navigate this complex area of the law. Contact us today to learn more.
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