There are some gray areas when it comes to personal injury law. One of those is distinguishing between physical injury and emotional injury, which must occur to determine the taxation on a settlement or award. Tax laws recently changed, which has made this complicated.
According to Forbes the IRS taxes personal injury damages that you receive for anything other than physical injury. While every case is different, you will have special circumstances if your case involves receiving a donor egg that lacked proper testing for genetic disorders. It may be tricky to know in which category your damages may fall under.
The bottom line
The easiest way to think of the rule about physical vs. emotional injuries is to consider why you made your claim. If you made the claim because there were physical issues as a result of the lack of testing, then your claim is for physical damages. However, if your claim is due to the emotional aspects of how this error impacts your life and the life of your child, then this would result in emotional damages.
The specifics
The tax law regarding your damages applies to injuries prior to birth, which is what happened in your case. As long as you sue the clinic for the physical injuries your child will suffer due to the genetic condition, then the IRS will not tax your damages. However, it is possible for the IRS to rule a part of the damages are for emotional injuries. Thus, you may have to pay taxes on part of the damages that you receive in your case.