1099-Misc from Class Action Lawsuit

Yes, enter the 1099-MISC since the IRS will be looking for it. 

Next enter an adjusting entry to make it tax-free. 

Diminution of Property lowers your basis, so whatever property this was against will lower that property's value or your basis. This will be relevant when you sell the property or if you are taking a loss for a business asset that was damaged. 

You might want to delete the 1099-MISC entry you made or edit it.

Sign into your account and return. Click the “Pick up where I left off” bar

Click on Federal on the left side-bar, then Wages & Income along the top.

When you get to the Income section, (you may need to click "Show All Income" first) Scroll down to 

1099-MISC and Other Common Income and Click Show more

Click Start or Revisit for Form 1099-MISC

Enter a description for the non-work income, such as “Diminution of Property Payment” for the reason and Continue

Click “None of these apply.” at the bottom of the list for “Does one of these uncommon situations apply? And Continue

Answer “No, it didn’t involve work like my main job.” on the next screen and Continue.

Click the year you got the settlement and Continue (if you received this income for more than 2 years, the

IRS will consider it as self-employment)

Answer “No, it didn’t involve an intent to earn money.” on the next screen and continue.

Do you have another 1099-MISC? Click No and Continue

Click Done.

The income from the 1099-MISC will show as a line item on line 21 of Schedule 1 of the 1040 and not as Self-employment. 

Next, make the adjustment for the reduction in value (basis) 

Click on Federal,,,Wages & Income,,,,

scroll down to the last section "Less Common Income"

Scroll down to the last choice "Miscellaneous Income, 1099-A 1099-C" and Start

Scroll down to the last choice "Other reportable income" and Start

For the Description enter "Reduction in basis for 1099-MISC" or a similar desription the IRS will understand 

Enter the amount of the settlement payment AS A NEGATIVE NUMBER

(remember that you are also reducing the basis in your property by this amount.)

Click Continue and Done

The 1099-MISC and your adjustment will show on Schedule 1 line 21 and flow to the 1040.