Does a person have to pay taxes on a discrimination settlement from your last employer?

Sorry. Taxable. Basically, they are saying they are replacing the other wise taxable income you were screwed out of. I only hope the ?#/@ on the paying side don't get to deduct it and have to treat it as a fine or penalty (which is not deductable). Damages for personal physical injury or sickness received as a lump sum or as periodic payments from the resolution or settlement of a suit are excluded from gross income. All awards of punitive damages, whether or not obtained in connection with a case involving physical injury or physical sickness, and damages for nonphysical injuries, such as damages for emotional distress, are not excludable from gross income. Damages received with respect to employment discrimination are not excludable from income. Recoveries of employment-related damages are includible in income unless they can be characterized as recoveries for personal physical injury or illness or recoveries in the nature of workers' compensation. Prior to 1996, damages received as a result of employment discrimination were sometimes excluded from income. Back pay received in job discrimination suits, including actions brought under the Age Discrimination in Employment Act (ADEA) and discrimination or sexual harassment actions brought under Title VII of the Civil Rights Act, must be included in income. Back pay compensates for lost wages, not for personal physical injury or sickness. Payments received for violations of the Employee Retirement Income Security Act of 1974 (ERISA) also represent taxable equitable relief, rather than excludable tort damages.

The Supreme Court has also held that damages for employment discrimination are not excludable because the ADEA and the Civil Rights Act do not establish any tort-like. Although the Civil Rights Act was amended in 1991 to expressly allow victims to recover tort-like compensatory and punitive damages, the Supreme Court has indicated that damages are not excludable unless they are awarded for a physical injury or illness. In the wake of these decisions, Congress amended the Code to make it clear that excludable damages are limited to those received as compensation for a personal physical injury or sickness.