Even if you received a Form 1099-MISC payment as compensation for medical costs you incurred and the pain and suffering you endured, you still have to report the payment as income. You can then enter offsetting adjustments to reflect that the payments were tax-free.
Enter the 1099-MISC 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 "Injury Compensation"
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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)
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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 "adjustments":
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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 "Injury Medical Costs" and the amount of those costs as a negative number. Entering "-$XXXX" here will offset the medical reimbursement amount included on the Form 1099-MISC. These are NOT wages.
Add another "adjustment" for the pain & suffering component of the 1099-MISC amount. Description could be "Injury - Pain & Suffering"
Corresponding negative amounts will be entered, and line 8 of Schedule 1, will be reduced by the amount of the non-taxable payments.
