Whether and how much of the amount of a legal settlement is taxable depends on the type of settlement proceeds you received and what they represented. Since you received a Form 1099, it should be accounted for on your tax return, as the IRS information return matching program will be looking for it.
Check the terms of the legal settlement. If you received punitive damages, this would be taxable income.
Property settlements that compensate for a loss in value of your property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement. If the property settlement exceeds your adjusted basis in the property, the excess is income.
if the settlement is fully or partly nontaxable to you because it is compensating you for a loss and not punitive damages, then enter it under Miscellaneous Income, then Other Reportable Income.
You would enter the full amount received as Other Reportable Income; then, make a second entry with a negative number to take out the nontaxable amount; that way, you would still have the full amount accounted for on your return. Use the explanation fields to describe the payment.
See IRS Publication 4345 for more information about legal settlements.
Legal fees related to personal issues typically can't be included in your itemized deductions under current law. See this tax tips article for more information.
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