state and federal tax on pharmaceutical settlements

New Mexico, Can state and federal tax you on your income tax on settlements on pharmaceutical law suits? If so what %??? Thanks, Dreamcatcher

The taxability of a settlement from a lawsuit depends on what the settlement is for. The portion of a settlement that is compensation for any item that would have been taxable is also taxable. For example, the part of a settlement that is for lost wages is taxable because the wages would have been taxable.

Any portion of a settlement that is taxable is added to your taxable income; therefore, in effect, it is taxed at your highest income tax bracket.

The following is from IRS Publication 17, Your Federal Income Tax, which you can download for free at
[url]http://www.irs.ustreas.gov/forms_pubs/index.html:[/url]

To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. Include the following as ordinary income.
· Interest on any award.
· Compensation for lost wages or lost profits in most cases.
· Punitive damages. See Punitive damages, later in this
discussion.
· Amounts received in settlement of pension rights (if you did not
contribute to the plan).
· Damages for: Patent or copyright infringement,
· Breach of contract, or Interference with business operations.
· Back pay and damages for emotional distress received to
satisfy a claim under Title VII of the Civil Rights Act of 1964.

Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

Emotional distress. Damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Do not include them in your income. If the emotional distress is due to a personal injury that is unrelated to a physical injury or sickness (for example, employment discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.

Punitive damages. Punitive damages generally are taxable. It does not matter if they relate to a physical injury or physical sickness. For more information on punitive damages, download Publication 525, at the above link.