The general rule
The IRS says the general rule for amounts received from settling lawsuits is Internal Revenue Code Section 61: all income is taxable from whatever source derived, unless another section of the code exempts it. Section 104 provides an exclusion for certain lawsuits, settlements and awards (IRS). Whether you must include a settlement in income "depends on all the facts and circumstances" (IRS Publication 4345).
What IRS Publication 4345 says, by type of payment
- Personal physical injuries or physical sickness: generally not taxable if you didn't deduct the related medical expenses in earlier years. The part that repays medical expenses you deducted before (to the extent you got a tax benefit) is taxable.
- Emotional distress not tied to a physical injury: taxable, reduced by certain related medical expenses.
- Lost wages: taxable as wages in employment-related suits; lost business profits are taxable business income.
- Loss in value of property: not taxable if less than your adjusted basis (you reduce your basis instead); any excess is income.
- Interest on a settlement is generally taxable, and punitive damages are taxable.
Source: IRS Publication 4345, Settlements: Taxability (Rev. 9-2023).
What about small consumer and privacy settlements?
The IRS publications above don't have a special rule for small consumer settlements; the same facts-and-circumstances analysis applies. For FTC refund programs, the FTC says it generally does not issue 1099s, but if it is required to report a payment it includes a 1099 with your check, and you should report that payment as income (FTC). If you have questions about your own situation, ask a tax professional or see IRS Publication 525.
Estimated tax
Publication 4345 notes that some recipients may need to make estimated tax payments if they expect to owe $1,000 or more after withholding and credits.