Get your taxes done using TurboTax

The 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, that is...it is considered to be non-taxable income.

Include the amount from the 1099 on Line 21 of Form 1040 with this description "1099 for Personal Physical Injury Non-Taxable $10,000...but turn and enter a second description that reads "1099 for Personal Physical Injury Non-Taxable -$10,000. Make sure you enter the second amount as a negative number. The effect of this is that the IRS will see that you have included the income properly and removed the income properly.

To enter these amounts in Turbo Tax follow this path:

1. Click the Personal Tab
2. Click the Personal Income, then continue on the same screen
3. Click the I'll Choose What I Work On button
4. Under the Less Common Income heading, click the Miscellaneous Income, 1099-A 1099-C button
5. Under the Miscellaneous Income heading, click the Other Reportable Income button
6. Answer the question if you received any other taxable income as "yes"
7. from here you will input the information as stated above "1099 for Personal Physical Injury Non-Taxable" including the amount as positive amount
8. Click the Add Another Miscellaneous Income Item button
9. repeat #7 except enter the amount as a negative amount
10. Click Continue, then click Done
    

 I have included the screenshots from Turbo Tax to help guide you in this process.

See IRS Publication 4345 (click here) for more information regarding the taxability of settlements.

Edited January 25, 2017 for additional instructions.