Often, yes. According to IRS Publication 4345, settlement money for emotional distress that does not come from a physical injury is generally taxable, and punitive damages and interest are taxable. How a settlement is allocated can affect the result.
The IRS explains in Publication 4345 that whether you must include settlement proceeds in income “depends on all the facts and circumstances in your case.” FCRA claims rarely involve physical injury, which affects how most of the categories below are treated.
What Publication 4345 says about common categories
- Emotional distress or mental anguish not arising from a personal physical injury or physical sickness: generally taxable. The taxable amount is reduced by medical expenses for the distress that you did not previously deduct, and by previously deducted medical expenses that gave no tax benefit.
- Punitive damages: taxable, reported as other income.
- Interest on a settlement: generally taxable.
- Lost wages in an employment-related lawsuit: taxable as wages and subject to employment taxes.
- Lost business profits: taxable and subject to self-employment tax.
- Personal physical injuries or physical sickness: generally not taxable, with exceptions for previously deducted medical expenses. This category usually does not fit an FCRA claim.
Allocation
A settlement can be divided among different types of damages. The IRS says it generally will not disturb an allocation in a settlement agreement if it is consistent with the substance of the settled claims.
Attorney’s fees
Publication 4345 notes that a settlement agreement may include an allocation to attorneys’ fees. How fees are treated for your taxes can depend on the facts, and Publication 525 has more detail on taxable and nontaxable income.
Estimated taxes
The IRS notes that some settlement recipients may need to make estimated tax payments.
This page is general information, not tax advice. Talk to a qualified tax professional about your own situation before you file.
Related
Sources
- IRS Publication 4345, Settlements: Taxability (Rev. 9-2023)
- IRS Publication 525, Taxable and Nontaxable Income
Updated November 2026. This page is general information, not legal advice.