Get your taxes done using TurboTax
Ideally, you would be able to contact the payor and have them send a corrected 1099-MISC that does not include the amount of loan principal repaid.
If you aren't able to get a corrected 1099-MISC, you will have to report the income and then enter an offsetting "expense" for the amount of loan principal you were paid.
To report the income:
If the 1099-MISC reports investment income that is not related to your main job or self-employment, enter the information as follows in the 1099-MISC interview:
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Enter the 1099-Misc in the Other Common Income section (Enter "1099 misc" in the Search Box and Select "Jump to 1099 misc form")
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For "Description", enter "Loan repayment with interest"
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Also check that it does not involve work like your main job, that it did not involve an intent to make money, and is not a recurring payment (received in the past or expected in the future) (these questions only apply to active, not passive, income).
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The income will be reported on line 8 of Form 1040 of your return (Other income from Schedule 1, Line 9).
To enter the "expense":
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Go to Less Common Income, Miscellaneous Income and Other reportable income. Enter "Lawsuit settlement" in the Search Box and Select "Jump to lawsuit settlement" "to get to this screen
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Continue to the screen "Other Taxable Income". Enter the description as "Repayment of principal" and the amount as a negative number. Entering "-$5000" here will offset the loan principal amount included on the Form 1099-MISC. These are NOT wages.
A corresponding negative amount will be entered, and line 8 of Schedule 1, will be zero. See the attached screenshot example of how your entries would look:
