Your settlement amount should end up on Line 21 of your 1040. If it is settled out of court, I would still consider it a lawsuit settlement.
To enter your 1099-MISC:
- Sign in to TurboTax and select the Take me to my return button on the main screen.
- Type “1099-misc” in the Search box and then select the “Jump to” link.
- Select Add a 1099-MISC, and input the information from your paper 1099-MISC, then select Continue.
- On the Describe the reason for this 1099-MISC screen,
type in "lawsuit settlement" and select Continue.
- On the Does one of these uncommon situations apply? screen, select This was money from a lawsuit settlement and then answer the back wages question before selecting Continue.
Emotional distress and mental anguish settlements are taxable, but only on the amount above and beyond the undeducted medical costs for treatment of the distress or anguish. You'll need to paper-file your return so you can attach a statement that shows the settlement amount minus the (undeducted) medical expenses related to treatment.
Emotional distress or mental anguish proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness above.
To enter it so you are not taxed, you will have to make an extra entry to zero it out:
Go through the same steps above but enter it as a negative:
- Select Add a 1099-MISC, and input the information from your paper 1099-MISC, then select Continue.
- On the Describe the reason for this 1099-MISC screen,
type in "non-taxable lawsuit settlement" and select Continue.
- On the Does one of these uncommon situations apply? screen, select This was money from a lawsuit settlement and then answer the back wages question before selecting Continue.
- Enter
the same amount of the settlement but as a negative.
- On
the Other Miscellaneous Income Summary make
sure you see the 2 items, one positive and
one negative and Total is $0.
