1099-MISC issued for Personal Injury Settlement

[fjackson06]

I was awarded a medical settlement for personal injury that is considered non taxable.  However, I received a 1099-Misc from the company I was awarded the settlement from with the full amount listed in box 10 as "Gross proceeds paid to an attorney", what do I need to do?

[robertw65]

Starting in 1997, only the amount of the settlement related to physical injury or physical sickness are tax free.  Any portion of the settlement attributed to emotional injury or defamation are now subject to tax.  If you do not report the amount from the 1099-Misc, you will receive a matching notice from the IRS.  

In terms of reporting, I would report the amount on the 1099 as other income.  I would add an additional amount of other income as a negative amount for the portion of the 1099 amount attributed to physical injury or physical sickness.

As an example, Let's assume the settlement was for $100 and $100 was reported on the 1099.  Let's alsoa assume $55 was for physical injury and $45 was for emotional injury. You would enter $100 of Other Income for Lawsuit Settlement Proceeds.  You would add a second amount of Other income for -$55 for Amount for Physical Injury.  The net result is the $45 for emotional injury is added to your Total Income.

I have no idea if TT will allow you to enter a negative amount of other income.  If you can't, I don't know how else to report it.  If it causes an e-file rejection, you may have to mail your return. 

[DianeW777 · Accepted solution]

It depends.  If the amount on your 1099-MISC was the portion of the award that was paid to your attorney on your behalf, the portion may not be tax free. If you find that a portion of it should be allocated to your personal injury, then that portion can be backed out. Once you confirm the taxable amount you can make your entry as follows.

Under the tax rules for settlements, amounts including the fees paid to the attorney are taxable. Unfortunately, beginning in 2018, after the signing of the Tax Cuts and Jobs Act (TCJA) there is no deduction on itemized deductions (Schedule A) for those attorney fees.

• IRS Audit Guide-Lawsuits, Awards and Settlements 

To enter the amount to your income from the Form 1099-MISC, follow the steps below. 

1. Legal settlements are reported as "Other Taxable Income." • Select Federal Taxes
2. Select Wages and Income
3. Scroll down and select Show More at Other Common Income
4. Select Start/Update next to Income from Form 1099-MISC
5. Answer Yes to the question Did you get a 1099-MISC? 
6. Complete the top part and then enter the award amount
7. Enter a reason for the income
8. Select "This was money from a lawsuit settlement" on the screen titled "Does one of these uncommon situations apply?" 

To remove any amounts that are for physical injury you can back out that portion by using the steps below.

1. Go to the Income and Expenses section of TurboTax
2. Scroll to  Less Common Income > Select  Miscellaneous Income, 1099-A, 1099-C
3. Select Other reportable Income > Enter a description and the amount as a negative number (-150 as example)

@fjackson06 

[fjackson06]

This was helpful but I don't see where I can enter a reason for the first part (step 7) on the 1099-MISC

[JamesG1]

Click Continue and see this page.