Punitive damages, liquidated damages, compensatory damages for nonphysical injuries or sickness (e.g., emotional distress) and any taxable damages other than amounts constituting wages are reported by a business payor on Form 1099-MISC.
Legal settlements that are taxable (including previously-deducted medical expenses related to physical injury or illness) are entered as miscellaneous (other) income.
When you received a 1099-MISC, follow these steps to report the income:
- Sign in to TurboTax and select the Take me to my return button on the main screen.
- Type “1099-misc” in the Search box and then select the “Jump to” link.
- Select Add a 1099-MISC, and input the information from your paper 1099-MISC, then select Continue.
- On the Describe the reason for this 1099-MISC screen,
type in "lawsuit settlement" and select Continue.
- On the Does one of these uncommon situations apply? screen, select This was money from a lawsuit settlement and then answer the back wages question before selecting Continue.
If you didn’t receive a 1099-MISC, follow these steps to report the income:
- Sign in to TurboTax and select the Take me to my return button on the main screen.
- Type “lawsuit settlement” in the Search box and then select the “Jump to” link.
- Answer Yes to the question Any Other Taxable Income?
- Enter a brief description and the amount you received and click Continue.
Interest earned on settlements is taxable income and should be entered as a Form 1099-INT.
