I received a legal settlement on form 1099-Misc.

[GGLG]

I received a legal settlement on form 1099-Misc. that should be applied to a previously filled out Schedule D form where I've been getting a deduction of $3,000 per year. How do I add the 1099-Misc income to lower the Schedule D long term capital loss?

[DaveF1006]

You still need to report your1099 MISC as taxable income for 2023 because it is a legal settlement and most be reported as such

1. Sign in to TurboTax and open or continue your return.
2. Search for 1099-misc and select the Jump to link.
3. If you're asked Did you get a 1099-MISC?, answer Yes
4. Enter the information from your 1099-MISC and select Continue.
5. On the Describe the reason for this 1099-MISC screen,
   enter lawsuit settlement and select Continue.
6. 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.

If this settlement resulted from an investment sale from a previous year,  you will need to amend that year's return to reflect changes that were made in the settlement of the lawsuit by editing the sale entry for the investment made in that return. 

[GGLG]

Thanks! I originally had the loss about 12 years ago, I need to do an amendment for that year and still pay taxes on the new 1099-Misc. form for this year?

[DaveF1006]

Yes, that is correct. Keep in mind, if you are trying to claim a refund from a return filed 12 years ago, you won't receive it. The IRS says Generally, you must file an amended return within 3 years after the date you filed your original return or 2 years after the date you paid the tax, whichever is later. 

Filing Amended Returns

[GGLG]

So there's no way to apply the 1099-Misc. income from last year to lower the amount of the loss from 12 years ago on Schedule D? I shouldn't have to pay taxes on income from a capital loss.

[DianeW777]

Based on your information you already recovered or are recovering your loss, from 12 years ago, because it carries forward until it is used up allowing all of it against other investment gains or $3,000 per year (as indicated in your comments) if there are no capital gains in a particular year.  This would require you to report the income now regardless of any amendment because the loss should have been used up by now or you will use the remainder of the loss against this income. 

As indicated by our Tax Expert @DaveF1006, the IRS will not allow an amendment beyond the statute.

• What is the deadline for filing an amended return?

@GGLG 

[GGLG]

If I can use this 1099-Misc Form last year I would still be owed another 3 years or so of being able to deduct the $3,000 capital loss. If I have to pay taxes on this 1099-Misc form I would have about another 18 years to deduct the $3,000 capital loss. How do I use the remainder of the loss against this income now? I can only use $3,000 per year correct?

[RobertB4444]

You have a capital loss carryover.  It can be used to offset capital gains - which is money that you make selling investments - or it can be used up at $3000 a year until it is gone.

The money that you recovered in the lawsuit was money that you had written off as a capital loss 12 years ago.  It turns out that that capital loss was not real - the money has shown up in your bank account to prove it.  So this needs to be entered as a capital gain.  You will enter it in the area for a 1099-B and that capital gain should remove that $3000 loss that you've been taking.

I am going to urge you to go see a tax professional.  This is a tricky business, this lawsuit recovery.  It would be best to get all of the details right.  I would file an extension and go see someone as soon as possible.

@GGLG