Amended Tax Return with Settlement Withholding

[nleibolt]

Hi,

    My wife worked as an au pair several years ago, and in April 2020, we received a settlement from a lawsuit that was filed because au pairs were being underpaid.  We received the settlement, but opted to have taxes withheld from our settlement check.  However, we withheld at our current tax rate (12%), and not at the rate at which she should have been taxed when she earned her wages, which is close to 0.  Is there a way to amend our tax return to get the money that we withheld, which we should not have withheld?

[nleibolt]

We already filed out 2020 taxes, by the way.

[MayaD]

Did you report the amount received and the taxes withheld on your tax return?

If you did, then you don't need to amend your return. Tax brackets apply to your taxable income—that is, your total income minus all your adjustments and deductions. If you overpay your taxes, the IRS will simply return the excess to you as a refund.

[nleibolt]

If I forgot to report it, I should amend my return and report the income and also taxes withheld, and I should get back the overpayment, correct?  And where should I go in the amended return to report this income?

   Thanks for your response

[DianeW777]

Yes. You should amend your return to include the settlement received by your wife. Use the steps below to report both the income and then the withholding. Read all the instructions before you begin.

• How to amend (change or correct) a return already filed (and accepted at the IRS)
  • Review the information here to be sure you need to amend your return.
• Steps to amend my 2020 return

Legal settlements are reported as "Other Taxable Income." You may or may not receive a 1099-MISC reporting the income. Regardless, this is how you should enter it:

• Select Federal Taxes

• Select Wages and Income

• Scroll down and select Show More at Other Common Income

• Select Start/Update next to Income from Form 1099-Misc.

• Answer Yes to the question Did you get a 1099-MISC? (even if you didn't get one).

• Complete the top part and then enter the award amount

• Enter a reason for the 1099-Misc.

• Select "This was money from a lawsuit settlement" on the "Does one of these uncommon situations apply?" screen

If necessary use these steps to enter your withholding (do not enter it twice in two different locations):

You can add additional federal (and state) withholding using the following steps.

• Sign into your TurboTax account > once inside the return select Deductions and Credits at the top
• Scroll to Estimate and Other Taxes Paid > Show More > Start/Revisit beside Income Taxes Paid > Scroll to Other Income Taxes Paid in 2020
• Continue to Start Withholding not already entered on a W-2 or 1099

This will allow both federal and state additional withholding not entered in any other location.