If compensatory damages given for emotional distress that shows physical symptoms, the IRS finds the money taxable. ... However, if a bodily injury has caused emotional distress, it is treated as a physical injury in a personal case and any damages awarded are not taxed.

What type of damages are not taxable?

Pain and suffering, along with emotional distress directly caused by a physical injury or ailment from an accident, are not taxable in a California settlement for personal injuries.

Are awarded damages taxable?

Receipts of damages and compensation may be assessable as ordinary income under Div 6 of the Income Tax Assessment Act 1997 (ITAA97), or as statutory income.