So I've been dealing with my dad's settlement stuff since we closed things out in August and honestly the tax piece caught me off guard even though I should've expected it. I work in healthcare so I know enough to be dangerous but taxes on settlements are their own weird thing.
From what I've learned through his accountant and some reading, the physical injury compensation part typically isn't taxable at the federal level. That's the big chunk usually. But then there's the punitive damages piece and any interest that accrued while the case was pending, and those absolutely get taxed as income. It matters a lot which portion is which in how they structure the settlement agreement.
My dad's settlement had to get broken down by his legal team into the actual injury compensation versus the punitive part, and his CPA spent like two hours going through it with us before the money hit the account. The interest alone was enough to matter when tax time came around.
Also state taxes vary wildly. We're in Illinois and there's state income tax considerations that don't apply the same way everywhere. I had to talk to someone who specifically knew Illinois rules because the federal stuff doesn't tell you the whole picture.
I'm not a tax person so definitely don't take this as gospel, but what I'd say is get a CPA involved before you finalize anything if you can. It's worth paying someone a few hundred bucks to make sure the settlement structure actually works for your tax situation. My dad would've owed way more if we hadn't caught some of this stuff early.