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How to handle group settlement

I received a small settlement along with my neighbors for loss-in-value on our properties.  This is non-taxable income that lowers the basis of our property. 

 

We each received a 1099-MISC that was the total amount of the settlement (not how much we individually received once it was divided). 

 

Do I report this total amount and then back out to account for the amount individually received?  Then back out again to account for the non-taxable income?  Or can I just back the whole thing out all at once?

 

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3 Replies

How to handle group settlement

There are two ways to handle this in turbotax.

1. Enter the 1099, then create an item of "other income" in a negative amount to offset the 1099.

2. Leave the 1099 off your return.  Print your return and file by mail, and attach a copy of the 1099 and a written explanation of why it is not taxable income.

 

People like #1 because they can e-file but I would find it hard to believe the IRS doesn't send letters to such people.  #2 will usually avoid another IRS letter (unless they lose your attachment) but you can't e-file.  In your case, I favor #2 even more because you have two issues; the income is non-taxable to begin with because it is a basis adjustment to your property instead, and the 1099 is issued in the wrong amount to the wrong people.

 

But if you take #1 and get a letter, you will be able to answer it with your story and proof. 

ToddL99
Expert Alumni

How to handle group settlement

You will have to report the total amount on your tax return, and then add an offsetting adjustment to remove it from your income.

 

The IRS will expect to see the 1099-MISC reported on your return, just as it was sent to you.

 

Since the 1099-MISC reports  income that is not related to your main job or self-employment, enter the information as follows in the 1099-MISC interview:  

  • Enter the 1099-Misc in the Other Common Income  section of Income and Deductions. (Enter "1099 misc" in the Search Box and Select "Jump to 1099 misc form")  

  • For "Description", enter "Loss in value settlement"  

  • Also check that it does not  involve work like your main job, that it  did  not  involve an intent to make money, and is not a recurring payment (received in the past or expected in the future) (these questions only apply to active, not passive, income).  

  • The income will be reported on line 8 of Form 1040 of your return (Other income from Schedule 1, Line 9).  

To enter the "expense":  

  • Go to Less Common Income, Miscellaneous Income and Other reportable income. Enter "Lawsuit settlement" in the Search Box and Select "Jump to lawsuit settlement" to get to this screen 

  • Continue to the screen "Other Taxable Income". Enter the description as "Loss in value settlement" and the amount as a negative number. Entering "-$ XXXX" here will offset the amount reported on the Form 1099-MISC. These are NOT wages.  

A corresponding negative amount will be entered, and the total line 8 of Schedule 1,  will be zero. 

 

(The previous post (from @Opus17) makes a good argument, but this solution is technically correct. In a perfect world, you would be able to contact the Payer and have them issue a corrected 1099-MISC).

How to handle group settlement

Thank you both so much! 

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