How to enter 1099-MISC Box 3 proceeds for emotional distress originating from a personal physical injury. Settlement from former employer obtained without court/lawsuit.

[CathiM]

Your settlement amount should end up on Line 21 of your 1040. If it is settled out of court, I would still consider it a lawsuit settlement.

To enter your 1099-MISC:

1. Sign in to TurboTax and select the Take me to my return button on the main screen.
2. Type “1099-misc” in the Search box and then select the “Jump to” link.
3. Select Add a 1099-MISC, and input the information from your paper 1099-MISC, then select Continue.
4. On the Describe the reason for this 1099-MISC screen,
   type in "lawsuit settlement" and select Continue.
5. 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.

Emotional distress and mental anguish settlements are taxable, but only on the amount above and beyond the undeducted medical costs for treatment of the distress or anguish. You'll need to paper-file your return so you can attach a statement that shows the settlement amount minus the (undeducted) medical expenses related to treatment.

Emotional distress or mental anguish proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness above.

To enter it so you are not taxed, you will have to make an extra entry to zero it out:

Go through the same steps above but enter it as a negative:

1. Select Add a 1099-MISC, and input the information from your paper 1099-MISC, then select Continue.
2. On the Describe the reason for this 1099-MISC screen,
   type in "non-taxable lawsuit settlement" and select Continue.
3. 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.
4. Enter the same amount of the settlement but as a negative. 
5. On the Other Miscellaneous Income Summary make sure you see the 2 items, one positive and one negative and Total is $0.

[CathiM]

If it is settled out of court, I would still consider it a lawsuit settlement.

[Tax_Customer]

This settlement was done without a lawsuit. As such, would I still type in "lawsuit settlement"? It was settled by our lawyer and the former employer's lawyer, without ever filing a lawsuit or going to court. Additionally, based on other research, it looks like proceeds received for emotional distress or mental anguish ORIGINATING from a personal physical injury are non-taxable. Is that correct? If so, how should it be entered?

[Tax_Customer]

And given it ORIGINATED from a personal physical injury, is it taxable?

[CathiM]

This is from <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p4345.pdf:">https://www.irs.gov/pub/irs-pdf/p4345.pdf:</a> Emotional distress or mental anguish
• The proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness above. However, the attorney has issued it to you as taxable in Box 3.

[CathiM]

IRS says not taxable but your 1099-MISC says taxable.  Did your husband receive proceeds from a settlement for physical injury?  If these are a follow up to a settlement for physical injury then it is not taxable.  The attorney that issued the 1099-MISC is classifying it as taxable.

[Tax_Customer]

The attorney did not provide the 1099-MISC, the former employer provided the 1099-MISC and they entered the amount in Box 3. The proceeds of the 1099-MISC for "emotional distress" settlement he received from his former employer, and the emotional distress did originate from physical injury or physical sickness.

[CathiM]

You can't enter the 1099-MISC on your tax return and mark it as non-taxable. There is no place the IRS gives you to mark it. You can leave it off your tax return, but keep your documentation in case the IRS questions why it isn't on your tax return. You will have to show them that it is not taxable.

[CathiM]

I put a method in the answer for you to enter a negative amount for the 1099-MISC to zero it out.

[Tax_Customer]

Thank you, Cathi. For some reason, I'm not seeing the answer on how to enter the negative amount.

Also, when looking back through my husband's email chain for the settlement, we see he provided a W0(, in order to obtain the 1099-MISC for the emotional distress payment.

[Tax_Customer]

sorry, meant to type W-9, not W0(

[CathiM]

When you get a 1099, it is for something taxable.  So the problem is, when you enter it, there is no where to mark it as not taxable. Here is a way to zero it out on your tax return. It is a work around, because IRS does not provide an easy way to override the way the employer issued it. Just keep your emails and settlement papers in case the IRS asks about it.  You have your justification for showing it as not-taxable. See next comment.

[CathiM]

To enter it so you are not taxed, you will have to make an extra entry for a negative amount to zero it out:

Go through the same steps above but enter it as a negative:

Select Add a 1099-MISC, and input the information from your paper 1099-MISC, then select Continue.
On the Describe the reason for this 1099-MISC screen,
type in "non-taxable lawsuit settlement" and select Continue.
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.
Enter the same amount of the settlement but as a negative.
On the Other Miscellaneous Income Summary make sure you see the 2 items, one positive and one negative and Total is $0.

[Tax_Customer]

I tried the method listed above, however, I notice that despite creating the 2nd 1099-MISC with all the same info, except the settlement amount as negative, my federal and state refund remain exactly the same, as if I'd never created the negative version. However, even by getting the Total to $0, the 1099-MISC seems to still be getting treated as taxable. If I don't enter the 1099-MISC info at all, in order to get $0 for Total 1099-MISC, I see that the refunds are far higher.

I'm not sure the work-arounds are working. We've already spent several hours and several days trying to resolve this.

Is this something that just cannot be done in Turbo Tax?