@BTC198 wrote:
I originally thought this would have been reported on a 1099-Misc, but the instructions on that form make it seem to say that Box 3 other income is used to report taxable damages. I think that is why they may have reported on the 1099-NEC instead? I'd hate to have an automated notice for SE tax. Any thoughts on how else to avoid that?
No. Unless you want to report it as self-employment and pay the SE tax and income tax. The IRS computers are basically set up to shoot first and ask questions later. They will see the 1099-NEC in your file and no matching schedule SE, and that will result in an automated notice. When you reply, that will get read by an actual human being. You should include information about the injury, any settlement documents, and any legal sources you might think support your case. You will have to convince the examiner of two things; the income is not compensation from working (including lost wages), and it is non-taxable within the meaning of 104(a)(2). If you only address the compensation issue and forget to address the injury issue, the examiner will likely revise your return to assess income tax.
I can't take the time to research PTSD specifically but this IRS document seems to have some useful information,
https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf
Compensation for PTSD would probably be non-taxable if the triggering event involved physical injury, but it will probably be considered taxable if the triggering event does not involve physical injury.
https://www.law.cornell.edu/uscode/text/26/104
Good luck.
