1099-MISC received with only column 10

[Anonymous]

After 8 long years I settled a  lawsuit against my HOA insurance company, in which I received no monetary gain except for  reimbursement of legal expenses.  The intent of the lawsuit, was to remove a stormwater drain, that was built illegally by the HOA contractor on my property without my consent or consultation, without township permit, nor adherence to township ordinances. Additionally, the lawsuit was intended to restore my land to its original condition or provide a stormwater solution as dictated by the township in its permitting process. Further, the HOA's illegal drain changed the flow of stormwater and directed the flow toward my dwelling, which is not permitted by covenants attached to my deed. Additonally, the covenants in my deed spell out that I can recover legal expenses, if I win a legal dispute with the HOA

I received a 1099-MISC, with only one box 10 filled in(gross paid to an attorney) from the HOA 's insurance company. To get the settlement money, I had to fill out IRS w9 form. I have all the records which show legal expenses paid by me. My legal expenses exceeded the settlement sum by a significant amount.

How do I report this in turbo tax without adding this settlement sum to my AGI as additonal income?

Can I just exclude the 1099-MISC from any turbo tax calculations or IRS forms, but attach the 1099-MISC and provide the explanation above?

What must I report, and what IRS forms are required to be submitted with my tax filing?

[MonikaK1]

Whether and how much of the amount of a legal settlement is taxable depends on the type of settlement proceeds you received and what they represented. Since you received a Form 1099, it should be accounted for on your tax return, as the IRS information return matching program will be looking for it.

Check the terms of the legal settlement. If you received punitive damages, this would be taxable income. 

Property settlements that compensate for a loss in value of your property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement. If the property settlement exceeds your adjusted basis in the property, the excess is income. 

See this help article for instructions for entering a legal settlement in TurboTax. If only part of the settlement is taxable as explained above, enter the entire amount of the 1099 and then make a separate entry of a negative amount and name it "nontaxable portion of settlement".

See IRS Publication 4345 for more information about legal settlements.

Legal fees related to personal issues typically can't be included in your itemized deductions under current law. See this tax tips article for more information.
 

[Anonymous]

Hi MonikaK1

The lawsuit complaint and the HOA covenants included clauses for reimbursement of legal fees. The complaint also included clauses for  injunctive relief that could not be settled with a monetary award.

The settlement agreement stipulation more or less covered the injunctive relief, with a remdiation plan, the cost of whcih would be totally borne by the defendant. There wa no increase in property value, as the complaint asked for the a permit to be sought from the township and any stormwater mitigation solutions to be approved by the township including excavation to bring the land back to its former state before the illegal stormwater drain was constructed. The illegal  construction, although done on my property, effected my neighbors, the township, and community as it represented a significant safety hazard to all.

A seperate NDA was required which I had to sign as well as w-9 to obtain my legal fee reimbursement( not exactly but close enough to what I spent). THe NDA did not spell out the exact purpose for which the  The 1099-G I received had only one entry for block 10 - attorney fees. I have all the bills I paid the attorneys.

So I am thinking the Covenants spell out legal fee recovery, the complaints spell out legal fee recovery, and the 1099-G only has attorney fees boxcheck.

I believe no income was gained by this lawsuit. What forms are necessay to be completed  for my taxes to adjudicated this?

[MonikaK1]

You should include the amount shown on Form 1099-MISC (assuming the one reference to 1099-G was a typo) in income, as the IRS information return matching program will be looking for it. 

To enter a 1099-MISC for a legal settlement:

1. Sign in to TurboTax and open or continue your return.
2. Search for 1099-misc and select the Jump to link.
3. If you're asked Did you get a 1099-MISC?, answer Yes.
   • If you've already entered a 1099-MISC, select Add Another 1099-MISC.
4. Enter the information from your 1099-MISC and select Continue.
5. On the Describe the reason for this 1099-MISC screen,
   enter lawsuit settlement and select Continue.
6. 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, after reviewing the terms of your settlement, the information below, and information previously provided, you determine that part or all of the payment is nontaxable, make a second 1099-MISC entry in TurboTax, with an explanation, and enter the nontaxable amount as a negative number.

If the payment represented a settlement paid in order to return your property to the state it was in before the illegal actions, and to attorney fees paid attributable to that settlement, then it would be nontaxable. If a portion of the payment represented punitive damages, then that portion and any attorney fees attributable to that portion would be taxable.

From this IRS article on Tax Implications of Settlements and Judgments:

Treatment of Payments to Attorneys - IRC 6041 and 6045 state that when a payor makes a payment to an attorney for an award of attorney's fees in a settlement awarding a payment that is includable in the plaintiff's income, the payor must report the attorney's fees on separate information returns with the attorney and the plaintiff as payees. Therefore, Forms 1099-MISC and Forms W-2, as appropriate, must be filed and furnished with the plaintiff and the attorney as payee when attorney's fees are paid pursuant to a settlement agreement that provides for payments includable in the claimant's income, even though only one check may be issued for the attorney's fees.

Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.

Unfortunately, attorney fees of this type are not deductible as miscellaneous deductions under current law. Current law only allows for the deduction of attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law on Schedule A. Business attorney fees may be deductible on Schedule C.