Class Action Settlement Payments Spanning 2 Different Tax Years

[vmmiller77]

I received a payment from a class action settlement. This isn't related to back pay, medical injury, mental injury, etc. The court settlement document indicates that it is taxable income. I received 2 payments. The first in 2024 for $500 and the remittance states that I was paid $500 because my total payment will be greater than $600 and the IRS requires a 1099 MISC for payments that exceed $600. Now I received a 2nd check in 2025 for $1,404 and the remittance states I will receive the 1099 MISC in Jan 2026 for the TOTAL award payment. They also automatically withheld and sent the IRS 24% of the TOTAL (2024/2025) award in anticipation of owed taxes. 

My question is - for my 2024 return, do I report the $500 since that check was cashed in 2024 even though the 1099 MISC I will receive in Jan 2026 is supposed to be for the entire award and will also reflect the withhold for the entire award?

[rjs]

Technically you should report the payment that you received in 2024 on your 2024 tax return. But rather than go to battle with whoever is making the payments to try to get them to report it correctly, I would just ignore it on your 2024 tax return and report the entire amount on your 2025 tax return, as shown on the 1099-MISC. And on your 2025 tax return you certainly don't want to report less than the full amount on the 1099-MISC. That would get you into a drawn-out battle with the IRS.

[vmmiller77]

I feel as though I should be reporting the $500 I received in 2024 on the 2024 return, however it seems it would be easier to do as you suggested. If I were to report the 2024 money on the 2024 return is there any way to indicate that on the 25 return? Just questioning as I don't know that much about complicated returns. (ie, report as income in 24 but indicate that taxes were already paid on that portion on the 25 return?)

[DianeW777]

Yes, you are required to report income in the tax year you received and had an unrestricted right to the money. You will put nothing on your 2024 tax return for federal or state withholding since it did not occur in 2024.

It's true they are not required to issue a 1099-MISC in 2024 because your $500 is below the filing requirement. However, the Payer should know that only the amount paid in 2025 should be included on the 1099-MISC they will issue to you. You can double check that with them so they issue the correct amount on your 2025 tax document. Likewise they will report only withholding that was taken from your gross amount and report that in 2025 also.

@vmmiller77 

[vmmiller77]

I believe you are saying that I should report $500 on the 2024 return as income but no withholding amount. The tax software will determine that amount with the rest of my income to determine if I owe additional tax on that. Is my understanding correct? If yes, where do I report the income with no 1099-MISC?

I believe that they will include the $500 in 2025 1099 for the following reason;

Payment #1 I received $500 2024

Payment #2 I received 1404.65 2025

Withholding sent to IRS was 601.46

That totals 2506.11

Settlement administrator indicated 24% of the total settlement would be sent to IRS

2506.11-24% = 601.46. The only way they could have withheld the 601.46 would be using the total of 2506.11. That is why I think  the 2025 1099 MISC will show a total income of 2506.11.

I have reached out to them for an answer.

[rjs]

If you want to report the income without a 1099-MISC, you can report it as "other income" on Schedule 1 line 8z with a description that you enter. Here's how to enter it in TurboTax.

• Go to Federal Taxes > Wages & Income.
• On the screen "Your 2024 Income Summary," scroll all the way down to the last section, "Less Common Income." Click the Start or Update button for the last topic, "Miscellaneous Income, 1099-A, 1099-C."
• On the next screen, "Let's Work on Any Miscellaneous Income," scroll down and click the Start or Update button for the last topic, "Other reportable income."
• The next screen asks, "Any Other Taxable Income?" Click Yes.
• On the next screen, "Other Taxable Income," enter a short description such as "Class action settlement" and enter the amount. Click Continue.
• On the next screen click Done.

[vmmiller77]

Ok, I do see how/where I would report it in TurboTax. But I'm still not sure what I 'should' do. I seem to have gotten 2 different answers on whether I should or shouldn't report the $500 in 2024. If I do report it, can someone answer the question from my prior response regarding how the tax software would handle it for each year? If I report the $500 this year and then the 1099 for next year also includes the $500 I would be paying tax on that amount twice, wouldn't I? 

[rjs · Accepted solution]

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@vmmiller77 wrote:

If I report the $500 this year and then the 1099 for next year also includes the $500 I would be paying tax on that amount twice, wouldn't I? 

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Yes, in that scenario you would be paying tax twice on the $500 that you received in 2024. That's why I recommended not reporting it on your 2024 tax return.

You got two different answers because we are making different assumptions about the 1099-MISC for 2025. @DianeW777 gave you the answer that is strictly correct legally. She is assuming that the 1099-MISC for 2025 will not include the $500 that was paid in 2024. She thinks that the settlement administrator will know that they should not include it, or that you will be able to convince them to not include it. But the information you have from the settlement administrator is not clear about what the 1099-MISC will include. If the 1099-MISC for 2025 will include the $500 payment, you should not report the $500 in 2024, even though omitting it is not strictly correct. I recommended not reporting the $500 in 2024, based on the assumption that your expectation of what will be on the 1099-MISC is correct. But you don't really know.

You said you have contacted the settlement administrator for clarification. I suggest that you wait to file your 2024 tax return until you get an answer from them. Then you can decide which recommendation to follow, based on their answer.

[vmmiller77]

Thank you and @DianeW777 very much. Both of your input has been invaluable. I appreciate you taking the time to outline my situation in detail and assist me. I will continue to work with the settlement administrator to get clarification on my particular situation.