Whether the amount of the legal settlement needs to be reported as taxable income depends on what it represents.
If you received punitive damages, this would be taxable income, and often a Form 1099-MISC would be issued.
Property settlements for losses in the value of a 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.
So, if the settlement reimbursed you for the amount you overpaid for something, that could be considered nontaxable and you would adjust your basis in what you purchased. If the settlement included an additional amount for punitive damages, that amount would be taxable.
If any of the amount represented back wages, that would be taxable and should have been reported on Form W-2.
See this help article for instructions for entering a taxable legal settlement in TurboTax.
See IRS Publication 4345 for more information.
If any of the settlement is taxable as damages but isn't for work you completed, you can enter it under Other Reportable Income. In TurboTax Online:
- Go to Wages and Income
- Scroll down to Less Common Income
- Go to Miscellaneous Income
- Select Other Reportable Income and follow the prompts. Enter a description of the reason for the payment.
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