text: do i have to pay taxes on a law suit settlement for sexual harassment and wrongful termination? in 2004 i finally received a settlement for a wrongful termination in 2001.  i was terminated for complaining about a person who was physically hurting me and making lude comments.  the company finally paid me, 1/2 went to the lawyer, and then sent a 1099.  i didn't claim it on my income tax, and now the irs is billing me for almost the entire amount i actually received.  my lawyer at the time said it was not taxable because it was for mental anguish.  what can i do? i'm pretty sure you do. here's an article that sums it up: http://www.ssd.com/publications/pub_detail.aspx?pubid=9195 one quote highlighted there: "under this rule, damages for pain and suffering, emotional distress, and punitive or exemplary damages are taxable." however, you may be able to deduct the attorney fees - the cut your lawyer took from your settlement. if that hasn't already been taken into account you might walk away with a little money.