Tax Court Rules $1.8M Settlement Is Taxable: Emotional Distress Claim Denied!

Federal law generally defines gross income as income from all sources. This includes income from settlements unless excluded by law, such as those paid for personal injuries or personal sickness. One married couple received a $1,800,000 settlement from the wife’s former employer, but they didn’t report the amount on their tax return. The wife argued that she’d suffered from emotional and psychological harm at work. The U.S. Tax Court found the settlement was for defamation and economic loss, not personal injuries or personal sickness. The court said the terms overwhelmingly showed that the amount must be included in income. A deduction for legal fees paid was allowed. (TC Memo 2025-80)