Are Class Action Settlements Taxed?
Do I have to pay taxes on the money received from a class action lawsuit? The simple answer is yes and no, and that’s because it depends upon the specific case. Typically, the settlement from a class action is a divided amongst all the people in the class and therefore the checks distributed end up being a small amount. Once you accept the settlement you must remember to report the earnings to the IRS
It is then up to the IRS to determine what income is subject to income tax. Generally, the IRS considers the reception of anything of value as taxable income. Therefore if you received a settlement for a faulty washing machine, then in theory the earnings would be considered taxable.
However, Title 26, Section 104, of the United States Code allows people receiving compensation for personal physical injury or physical sickness to exclude those amounts from their gross income. That means, if that faulty washing machine caused you physical harm then the earnings might not be taxable. Since this question is not as simple as yes or no, we suggest you always consult with an accountant