@ChrisPD wrote:
Opus 17,
If I receive a 1099 for the $40k settlement in 2022 and traded in the car in 2022, would I still need to report the 1099 income in my Form 1040 as well as the long term capital gain when I traded in the car?
Would the 1099 Misc income be entered, as some have suggested, as proceeds from a law suite settlement $40k, then under Misc Rev and Exp as less common revenue as a negative amount ($40K), thus netting it to zero for income reporting purposes? In addition would I also record the net gain (the example was $16k) on the sale of the car as a long term asset? Thank you for your help!
There are 3 ways I can think of to deal with a 1099-MISC for the settlement.
1. Do as you suggest, add the 1099 as other income, then add a minus $40K other income amount to offset it, then report the capital gain separately, and e-file.
2. Ignore the 1099 and e-file.
3. Leave the 1099 off your return and file by mail. Attach a copy of the 1099 and a written statement explaining the situation and why the income is not taxable as other income (and that you did report it as a capital gain).
#3 is the official instruction from the IRS but it doesn't take into account the reality that paper-filed returns are backlogged and sometimes lost, and e-filing is strongly advised. #1 is the typical advice from Turbotax experts, but you may get a letter from the IRS asking to explain the offsetting entry. (You can't attach an explanation with your return, but save your documents for at least 3 years so you can send an explanation with proof if asked.) #2 is least complicated to file but will definitely result in an IRS letter you will have to respond to later. I would go with #1.
