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.

1. Interest on any award.
2. Compensation for lost wages or lost profits in most cases.
3. Punitive damages. It does not matter if they relate to a physical injury or physical sickness.
4. Amounts received in settlement of pension rights (if you did not contribute to the plan).
5. Damages for:
   • Patent or copyright infringement,
   • Breach of contract, or
   • Interference with business operations.
6. Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
7. Attorney fees and costs where the underlying recovery is included in gross income.

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: Emotional Distress itself is not a physical injury or physical sickness. However 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 not due to a physical injury or sickness (for example, unlawful 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.

Yes, Form 4972 is used to report and figure tax on Lump-Sum Distributions.

Worker's compensation for an occupational sickness or injury if paid under a worker's compensation act or similar law is not taxable. You do not need to report this income on your tax return.

Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.

State and local income tax refunds are taxable if the refunded tax was deducted in a prior year and the taxpayer received a tax benefit from the deduction. Refunds are not taxable if the taxpayer did not itemize deductions in the prior year. Refunds are partially taxable if the taxpayer's itemized deductions exceed the taxpayer's standard deduction by less than the amount of the refund. Use the worksheet to determine the taxable portion of the state refund. Check the list of special situations before using the worksheet.