IRS Publication 525 — Taxable and Nontaxable Income

Publication 525 (2025) 31

Child support payments. You shouldn’t report these payments on your return. See Pub. 504 for more information.

Court awards and damages. To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.

1. Interest on any award.

2. Compensation for lost wages or lost profits in most cases.

3. Punitive damages in most cases. It doesn’t matter if they relate to a physical injury or physical sickness.

4. Amounts received in settlement of pension rights (if you didn’t contribute to the plan).

5. Damages for: a. Patent or copyright infringement, b. Breach of contract, or c. Interference with business operations.

6. Back pay and damages for emotional distress received to satisfy a claim under title VII of the Civil Rights Act of 1964.

7. Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.

8. Attorney fees and costs relating to whistleblower awards where the underlying recovery is included in gross income. Don’t include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments). Emotional distress. Emotional distress itself isn’t a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Don’t include them in your income.

If the emotional distress is due to a personal injury that isn’t due to a physical injury or sickness (for example, unlawful discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.

Deduction for costs involved in unlawful discrimination suits. You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in section 62(e), a claim against the U.S. Government, or a claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Schedule 1 (Form 1040), line 24h. The following rules apply.

• The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the U.S. Government, or the claim under section 1862(b)(3)(A) of the Social Security Act.