How do I enter a 1099-Misc that is only partially taxable?

[JoeK]

I received a 1099-Misc for a lawsuit settlement payment that is partially taxable (emotional distress) and partially not taxable (real property reimbursement).  How do I enter this 1099-Misc on Turbo Tax?

I have tentatively entered the taxable amount in Box 3 but it's around half of the amount shown on the actual 1099-Misc generated by the law firm, so can I simply include a letter explaining my settlement and how the taxable portion is calculated?  Will that work?  The law firm will not issue two separate 1099s.

[Mike9241]

i would delete the 1099-MISC because you can't describe what it is - it merely shows as an amount from 1099

in forms mode click on the forms tab at the top

then open form

then enter in the search box  - other income 

on line 22 in the Turbotax form enter  - lawsuit settlement per 1099 and amount

right below that  enter  - nontaxable amount included and amount

this will allow you to e-file.

with a letter you would have to mail the return - it will be months before you know if you succeeded because there is no way to know what the clerk entering your return will do with the letter.  if you do mail it, be sure to follow Turbotax filing instructions and I highly recommend mailing using a method where you can either track it or get proof of delivery.

even if you use my method so you can e-file, the IRS might still send you a letter/notice requesting additional info.

[JoeK]

I'm definitely going to file by mail, tracking USPS, including copies of the checks and a letter of explanation.  I currently have the 1099-Misc in the regular area in Turbo Tax because it DOES provide the opportunity to describe what the 1099-Misc is for.  I put the taxable amount in Box 3 (which makes it different from the physical 1099) and put this in the description:

"Lawsuit payment - property $XXXXX and emotional distress $YYYYY" - with the emotional distress portion in Box 3. 

Will that work, or would it be better to delete the 1099 entirely and enter it like you suggested in Other Income?  Your suggestion might be better since I'm a little concerned about changing what is reported on the physical 1099 like in my current method, but I note that when I go to that "Other Miscellaneous Income" area it says "Do not enter 1099-Misc here".  Or could I enter the 1099 for the full amount in the regular income area identical to the physical one and then do a negative entry in Other Miscellaneous Income backing out the non-taxable portion with a detailed description?  I just checked and Turbo Tax WILL let me do a negative entry there.  I think I'm leaning towards this negative Other Miscellaneous Income method because it allows me to enter the 1099 identical to the physical document in the appropriate area and then adjust the taxable portion separately in the Other Miscellaneous Income area.

Note that I also have a 1099-Misc for our trust (the property portion of the settlement is split three ways between my wife and I as individuals and our Trust) which is entirely non-taxable, but Turbo Tax wants 1099s to be for individuals only; it won't let me enter it as being for both of us.  I'm thinking for that one I won't enter it anywhere and instead will include a copy of the check made out to the trust and describe everything in detail in the letter?

[Mike9241]

which will work best can't say but the problem with manual attachments is what is done with them once the IRS gets the return. your problem with entering just the taxable portion on the tax return is that the amount will not match with the IRS records. their computer might automatically generate a mismatch notice and a bill for the difference. can't say for sure.  neither can I guarantee my method will work but at least the IRS will be able to match the amount on your return to the amount on the 1099.  I see no way to enter a description on the 1099 that carries to schedule 1.

who gets the nontaxable portion is irrelevant. 

it's your return and you should do what you feel is best. the worse that can happen is that you get a bill from the IRS which you can refute by supplying adequate documentation 

[JoeK]

I'm thinking that entering the 1099-MISC in the standard area with amounts that match the physical 1099 sent to them has the best chance of NOT getting flagged by their automated system, and then put a negative adjustment in the Other Miscellaneous Income section to get to the correct taxable amount with an explanation letter.  IRS guidelines recommend that explanatory letters be filed with the return for unusual circumstances so I suspect there are systems in place to make sure the letter remains with the return, and as you mention if they ask for further documentation it can be provided.  I'd like to approach it so that their response, if any, would be manually prepared on their end rather than having the automated system say I entered the 1099 incorrectly.  Does this make sense?