Normally, income is reported to the state where you receive it - that is why the W-2 shows wages for Connecticut, because that is where you were living when you earned the wages.
Your 1099-MISC, however, is not earned income. (It is "Other Income" and should be entered as below.) You should consult with your lawyer to be certain, but your 1099-MISC is taxable to both states. Remember you can get a Credit for Taxes Paid to Another State on your Resident state return. Just be certain you do your Non-resident state return first.
Punitive damages are taxable and should be reported as “Other Income” on Form 1040, Schedule 1, Line 21, even if the punitive damages were received in a settlement for personal physical injuries.
Bear in mind that an employee is allowed an above-the-line deduction for amounts attributable to
attorneys’ fees and costs received on account of certain discrimination/retaliation claims,
whistleblower claims, and civil rights claims. In those
circumstances, an employee may be able to deduct legal expenses incurred incurred during his or her lawsuit.
To
correctly enter the 1099-MISC so that it does not prompt a Schedule C, take the
following steps:
- In your open Federal
return,
choose the tab for Wages & Income
- Tab through or down
to Other Common Income (you may have to choose Add more income and then See more income to view this
topic) and then Show More
-
Start/Revisit Form 1099-MISC
-
Edit the 1099-MISC if you already entered it, or Add it now and enter the information on the form,
then Continue.
- On the screen Describe
the reason for this 1099-MISC enter your description.
- On the screen Does
one of these uncommon situations apply? choose None
of these apply.
- On the screen Did the [Description]
involve work that's like [Name's] main job? answer No.
- On the next screen,
choose the year you received the money. (In this case, 2018.)
- On the screen Did
the [Description] involve an intent to earn money? choose No and complete the interview.
This will place the
1099-MISC on Form 1040, Schedule 1, Line 21. To enter your deductible attorney fees and costs (if applicable),
- In your open Federal
return,
choose the tab for Wages & Income
- Scroll down to Less
Common Income and Show more
-
Start/Revisit Miscellaneous Income and
choose Other reportable income
- Say Yes to continue to the screen "Other
Taxable Income". Enter your description and the amount as a negative number.
A corresponding
entry will appear on Form 1040, Schedule 1, Line 21 of your return. You may not see it, but it's there.
[edited 2.21.19 | 8:25 am]
