I have looked on my Schedule A, and I do not see a line to enter this settlement amount to offset the 1099 Misc.
Wrongful Foreclosure of my home. The amount was the difference between the actual value of my home and what it was sold for at auction. So it was for actual loss, not punitive.
If you had sold the home, would you have qualified for the capital gains exclusion based on the number of years you lived there and owned it? If you had sold the home for the price that you settled for, would you have owed capital gains tax?
I had owned the home for 12 years. So I am not sure if I owe capital gains or not.
You would've qualified to exclude $250,000 of your gain if you were single or head of household, and $500,000 of gain if you were married filing jointly. Any gain over that amount would be taxed as a long-term capital gains to you.
You could have owed capital gains tax even if you were foreclosed. For example, if you bought the home for $200,000, and it had a foreclosure value of $800,000, that would be a $600,000 capital gain. The fact that you might have taken out a second mortgage or home-equity loans that you could not pay would not change the fact that you have a capital gain.
The point of all of this, is that if you would have owed capital gains tax if you had sold the home for the adjusted price, or if you would have owed capital gains it on the foreclosure at the adjusted price, then the settlement is probably taxable as a capital gains. Because it would have been taxable if it had been part of the sale or foreclosure price. However, if you would not have owed capital gains tax, then the settlement is not taxable either.
We may need more facts and figures on the foreclosure of the house. Or, you may want to see a professional tax advisor.
There are two possible procedures on how to deal with the 1099 form that needs to be reported differently, but I'm not yet sure whether or how this should be reported.
The home was worth $255,000 and was sold for $170,000 at auction. The Settlement was for $85,000. So it would appear that I don't owe capital gains tax.
@Hal_Al I think you have a canned answer that can help here.
There are three ways to deal with this.
1. Contact the payer and try and get the form rescinded.
2. The tax instructions say that if you receive a 1099-MISC in error, you don't report it as income. You will need to file by mail; you can't e-file. Attach a copy of the 1099-MISC to your tax return along with a written statement explaining why the income is not taxable and the 1099-MISC was entered in error. In your case, you would explain that this was a settlement for lost value of your home in a mistaken foreclosure; that the settlement represents a capital gain on your home; that you qualify for the $250,000/$500,000 exclusion based on your ownership and residency; and that even with the settlement included, your gain would be less than the exclusion amount, so it is not taxable.
The IRS has been known to lose such letters, so keep copies of everything in case they send you a letter later wondering why you didn't report it.
3. You can report the $85K as taxable income, then go to the "other income" section and create an item with an offsetting negative amount (-$85K) and then e-file your return. I personally don't like the idea of adding fake information to a tax return just to get it to e-file, and we have seen occasional reports that the IRS will send letters asking for an explanation. But the procedure does exist and can be used if you want to. I think @Hal_Al has a walk-through of how to do this in the program.
Report the income as misc line 21 income* (enter in TurboTax at the 1099-Misc screen) . Then enter a line 21 deduction, for the same amount. In TurboTax (TT), enter at:
- Federal Taxes tab
- Wages & Income
- “I’ll choose what I work on” Button
Scroll down to:
-Less Common Income
-Misc Income, 1099-A, 1099-C
- On the next screen, choose – Other reportable income - Enter the number with a minus sign (-) in front. Briefly explain at description.
*Line 8 of Schedule 1 on the 2019 and 2020 forms and line 21 of schedule 1 on the 2018 forms.
Hello, Is there a way to enter this same/similar situation on the current 2020 version of Turbo Tax.
On Schedule 1, line 8, I already entered 2 separate entries in the 1099-NEC (this is the form I received) section and they net out to $0 shown on the Schedule 1. But I want both amounts to show (positive being offset with negative) and a description of "Non-taxable compensation under IRC section 104(A)(2)".
So basically, is there a way to show 2 line items on Schedule 1, line 8? Something like this...
COMPANY NAME $XX,XXX
"NON-TAXABLE..." -$XX,XXX
TOTAL NETTING TO $0
@BTC198 wrote:
Hello, Is there a way to enter this same/similar situation on the current 2020 version of Turbo Tax.
On Schedule 1, line 8, I already entered 2 separate entries in the 1099-NEC (this is the form I received) section and they net out to $0 shown on the Schedule 1. But I want both amounts to show (positive being offset with negative) and a description of "Non-taxable compensation under IRC section 104(A)(2)".
So basically, is there a way to show 2 line items on Schedule 1, line 8? Something like this...
COMPANY NAME $XX,XXX
"NON-TAXABLE..." -$XX,XXX
TOTAL NETTING TO $0
I don't like the "negative entry" method in any case. If turbotax is netting the entry to zero for line 8, you would have to use the desktop version installed on your own computer, go to forms mode, and type the explanation in yourself.
Also be aware that the IRS will almost certainly send you a letter demanding you prepare a schedule SE and pay SE tax. It will be triggered by the 1099-NEC, because the IRS will assume that all 1099-NEC income is compensation for services performed. Anything you write in the tax form is unlikely to stop the automated assessment, assuming someone even reads your comments. You will need to respond with documents showing why this money is not compensation for working.
Why did you get a 1099-NEC? Was this for income replacement of some kind ? If so you cannot just negate it on the Sch 1 as you indicate.
This was from a settlement, PTSD damages paid from an old employer. I know it is not black and white regarding whether PTSD is considered physical injury or not. Let's just say this is non-taxable.
I originally thought this would have been reported on a 1099-Misc, but the instructions on that form make it seem to say that Box 3 other income is used to report taxable damages. I think that is why they may have reported on the 1099-NEC instead? I'd hate to have an automated notice for SE tax. Any thoughts on how else to avoid that?
@BTC198 wrote:
I originally thought this would have been reported on a 1099-Misc, but the instructions on that form make it seem to say that Box 3 other income is used to report taxable damages. I think that is why they may have reported on the 1099-NEC instead? I'd hate to have an automated notice for SE tax. Any thoughts on how else to avoid that?
No. Unless you want to report it as self-employment and pay the SE tax and income tax. The IRS computers are basically set up to shoot first and ask questions later. They will see the 1099-NEC in your file and no matching schedule SE, and that will result in an automated notice. When you reply, that will get read by an actual human being. You should include information about the injury, any settlement documents, and any legal sources you might think support your case. You will have to convince the examiner of two things; the income is not compensation from working (including lost wages), and it is non-taxable within the meaning of 104(a)(2). If you only address the compensation issue and forget to address the injury issue, the examiner will likely revise your return to assess income tax.
I can't take the time to research PTSD specifically but this IRS document seems to have some useful information,
https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf
Compensation for PTSD would probably be non-taxable if the triggering event involved physical injury, but it will probably be considered taxable if the triggering event does not involve physical injury.
https://www.law.cornell.edu/uscode/text/26/104
Good luck.
When you make the negative entry at Less common income, type "Non-taxable compensation under IRC section 104(A)(2)" for description. That is what TurboTax will show on line 8 of Schedule 1.
Line 8 will show:
Nonemployee compensation from 1099-NEC $XX,XXX
Non-taxable compensation under IRC section 104(A)(2) -$XX.XXX
Thank you all for your help!
Last question, would it be better to ask the employer to report the amount on a different form so that an automatic SE tax response won't be generated? Or is it too late for that as the 1099-NEC has been filed? If so, which form? I still the think the 1099-Misc is supposed to show the taxable amount but maybe still better than generating an automatic response?
@BTC198 wrote:
Thank you all for your help!
Last question, would it be better to ask the employer to report the amount on a different form so that an automatic SE tax response won't be generated? Or is it too late for that as the 1099-NEC has been filed? If so, which form? I still the think the 1099-Misc is supposed to show the taxable amount but maybe still better than generating an automatic response?
You could ask if the payer will cancel/rescind the 1099-NEC and issue a 1099-MISC. They are not required to do so, especially if their tax advisors think a 1099-NEC is correct in this situation.
If the income is truly non taxable, a 1099, of any kind, should not have been issue. So, better than changing to a 1099-Misc, you want the employer to issue a corrected 1099-NEC showing 0 in box 1.
@Hal_Al wrote:
If the income is truly non taxable, a 1099, of any kind, should not have been issue. So, better than changing to a 1099-Misc, you want the employer to issue a corrected 1099-NEC showing 0 in box 1.
The taxpayer who re-started this thread, @BTC198 , received a settlement for PTSD. It's my expectation that the former employer issued the 1099 because the payment was more than $600, they want to be in compliance with the IRS, and its the taxpayer's responsibility to determine if the income is taxable, and not the company's responsibility.
Which position I completely understand (although we might quibble that it should have been a 1099-MISC instead of a 1099-NEC, but then again, we don't know all the facts and circumstances).
I really think @BTC198 is over-thinking the situation and worrying needlessly. If they have proof of what the settlement is for, they can make their case.
An option which would achieve the same bottom line and avoid any IRS letters would be to enter the 1099-NEC on the Sch C where the IRS computers expect to see it be reported and then enter a misc deduction for the entire amount to negate the income.
@Critter-3 wrote:
An option which would achieve the same bottom line and avoid any IRS letters would be to enter the 1099-NEC on the Sch C where the IRS computers expect to see it be reported and then enter a misc deduction for the entire amount to negate the income.
But then you are filing a completely incorrect tax return because you are afraid of a computer. I would not do this, and I think I need to unsubscribe and not make further comments.
This option has been used successfully when a corrected 1099 cannot or will not be issued. This has been discussed many times in the forum and many have agreed to this method as long as the user knows the income is absolutely NOT taxable and the incorrect form was issued.