It depends. Legal settlements are often taxable, depending on the type of settlement and would have been indicated in your settlement agreement. Non-injury settlements are considered other taxable income. You should receive a Form 1099 if your settlement is taxable. You will be taxed on the income based on the tax bracket that you fall in and the federal income tax rates.
Refer to the TurboTax article Are legal settlements taxable? for more information.
If you receive a form 1099-MISC, follow the instructions below to enter your settlement income:
- Sign in to your TurboTax account
- Type 1099-MISC in the search box
- Select Jump to 1099-MISC
- Select yes to enter a 1099-MISC or Add another 1099-MISC
- Enter the information and select Continue
- When you get to the Describe the Reason for this 1099-MISC enter Lawsuit Settlement and select Continue
- When you get to the Does any of these uncommon situations apply? Select This was money from a lawsuit settlement and answer the question regarding back wages and select Continue.
For additional information, review the TurboTax help article Where do I enter an award from a taxable legal settlement?
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