Receiving a financial settlement or court award for a personal injury can be a significant relief after a difficult ordeal. But before you count every dollar, it is important to understand how the IRS treats these payments. Not all awards are created equal when it comes to federal income taxes. Compensation for physical injury or sickness is generally tax-free, while payments tied to non-physical claims, punitive damages, and interest can be taxable. Attorney fees add another layer of complexity. Knowing the rules in advance can help protect more of what you have rightfully earned.

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