I received a settlement from lawsuit as a class member, but it was confirmed the settlement it's not 1099 reportable payment, not W2 reportable payment, should I file that payment?

[Justin202203]

Hi There,

I received a settlement from lawsuit as a class member, but it was confirmed the settlement it's not 1099 reportable payment, not W2 reportable payment, I didn't received any 1099 or W2 related this payment ,should I file that payment?

Thank you very much.

[Cynthiad66]

Yes - the proceeds from your lawsuit are taxable

What do you mean it was confirmed the settlement  was not reportable. It sounds as if you received a 1099-MISC reporting the income.

Follow these steps to report your settlement.

This is how you should enter it in TurboTax: per Irene2805

1. Click on Federal > Wages & Income  
2. Scroll down to the Other Common Income section and click on the Start/Update box next to Income from Form 1099-MISC.
3. If you previously entered a 1099-MISC. in your return, you will be brought to the 1099-MISC Summary page.  Click on the Add Another 1099-MISC. box to add a new form [or Edit to change an existing form].
4. If you haven't already entered a 1099-MISC, answer Yes to the question Did you get a 1099-MISC? (even if you didn't get one).
5. On the Let's get the info from your 1099-MISC screen, complete the top part and then enter the award amount in Box 3 Other Income. 
6. Fill out any other boxes from your paper 1099-MISC, then click Continue.
7. Enter a reason for the 1099-MISC,
8. On the screen, Does one of these uncommon situations apply? select This was money from a lawsuit settlement  and then answer the back wages question before clicking Continue.  

[Justin202203]

Hi,

Team who is responsible for transferring the payment to me said they confirmed with related teams that this is not 1099 and nor W-2 payment.

Could you please share the laws and regulations that have to report it?

Thank you very much.

[JulieS]

Whether or not this amount is taxable depends on a number of factors, but the primary one is, What is the compensation meant to replace?

Some cases are very clear, such as a lawsuit to get back wages. That is taxable because the proceeds are meant to replace wages, which are taxable. 

In general, class action lawsuits are meant to replace a value you did not receive, or return an amount that you were overcharged. 

The IRS codes actually state that lawsuit proceeds are taxable unless there is a specific exception based on the facts and circumstances. 

Click here to learn more about this topic.

[Justin202203]

Thank you Julie.

I had an investment $50,000 for partnership, and received loss K1 every year, then the partnership said they will merge with other company, and ask me to agree to get cash $45,000. After lawsuit they refund me $8,000, so I only have to report 3,000[Which calculate this way(8,000-(50,000-45,000))], is that correct? 

Or I should ask Court if this$8,000 is  punitive?

The amount is an example, I didn't consider the fees they charged.

Thank you very much.

[PattiF]

Some additional information is needed to determine the exact type of settlement that you received from the lawsuit. You should ask for additional information so that the payment and transactions can be recorded accurately. It might be a return of basis or some other type of distribution. Did you receive a 1099-MISC for the settlement?

[Justin202203]

Hi There,

I got reply: "The settlement should be considered to be a partial collection of the lass member's interest in the original property."

I summarized the case back ground below :

I had an investment $50,000 for partnership, and received loss K1 most of the years, then the partnership said they will merge with other company, and ask me to agree to get cash $45,000 consideration. And I received $45,000 in 2018, my CPA booked the loss in 2018. After lawsuit they paid me settlement $8,000,  should I report this $8000 as capital gain? Or $3000,(8000-(50,000-45,000) as capital gain?

Or how should I report it?

Thank you very much.

[DaveF1006]

To clarify, did you receive a 1099 MISC form or any other tax form reporting this income?

@Justin202203

[Justin202203]

Hi Dave,

No, and the team who is responsible for paid the settlement confirmed with me this is not 1099 reportable income, and not W2 income either.

Thank you.

[Justin202203]

Hi There,

Anyone can help ? I can summarize the case background again if needed.

Thank you very much.

[DawnC]

Well, pretty sure you are not getting a tax form for the income at this point, but it is still unclear how the court has classified the payment.    You may want to check with the CPA that 'booked the $5K loss'.    Generally, all settlements are taxable unless specified by the tax code.   For damages, the two most common exceptions are amounts paid for certain discrimination claims and amounts paid on account of physical injury.   

Awards and settlements can be divided into two distinct groups to determine whether the payments are taxable or non-taxable. The first group includes claims relating to physical injuries, and the second group is for claims relating to non-physical injuries.   Within these two groups, the claims usually fall into three categories:

1. Actual damages resulting from physical or non-physical injury; 
2. Emotional distress damages arising from the actual physical or non-physical injury; and 
3. Punitive damages - Punitive damages are not excludable from gross income 

If the income is not excludable from income and you do need to report it,  here are the steps to report ordinary or wage income without a tax form in TurboTax:

 

1. Sign into your TurboTax account.
2. Select Pick up where you left off or Continue your return.
3. Select Federal from the left side menu.
4. Type other reportable income (use that exact phrase) in the search bar and click on the Jump to other reportable income.   Copy and paste the phrase if you don't get the link.
5. On the Other Wages Received screen, select No at Did you receive any other wages?   Select Yes only if your settlement was employment-related; you’ll be directed to enter your wage income.
6. You should land on the Miscellaneous Income screen, scroll down and click Start or Revisit next to the last item - Other Reportable Income.  
7. On the Any Other Taxable Income? screen, select Yes.    If you already have miscellaneous income reported, click on Add Another.
8. On the Other Taxable Income screen, enter a description (taxable settlement) and the amount determined to be taxable, then Continue.
9. On the Other Miscellaneous Income Summary screen, confirm the entry and select Done.

[Justin202203]

Hi There,

Team who is responsible for paying the settlement confirm with me: "The settlement should be considered to be a partial collection of the class member's interest in the original property."

Does this clarify the settlement is taxable or non-taxable?

And what should I confirm with previous CPA regarding 2018 tax return $5000 loss?

According to the team who is responsible for paying the settlement, this is not W2 income, nor 1099 income, where should I input this income if taxable? I am asking because I saw the way you mentioned is to report W2 income in Turbotax.

Thank you very much.

[GeorgeM777]

It appears that at least part of the settlement was a return of your original investment of $50,000.  A return of capital would not be taxable.  However, in a prior post you mentioned that for tax year 2018, your CPA included your $5,000 loss on your return.  So what happened is that you got the benefit of the $5,000 loss for tax year 2018, and now because of the settlement, you are getting your $5,000 returned to you plus an additional $3,000.   The $3,000 is probably taxable and should be included on your return using the following method: 

In TurboTax online, 

1. go to Income & Expenses, 
2. scroll down the page to the last item Less Common Income, 
3. select Miscellaneous income, 
4. then from the list select Other reportable income.  
5. you will have to enter the amount you received plus a short description.    

Yes, you should inform your CPA about the settlement you received and remind the CPA that your 2018 return reflects that you took a $5,000 loss on your partnership investment which has now been returned to you as a result of the legal settlement.  If it turns out that you need to report the $5,000 in the same manner as the $3,000, then you can again use the above method.  However, if your CPA can quantify for you what tax benefit you received as a result of deducting the $5,000 loss in 2018, then perhaps only that tax benefit needs to be taxed for 2021, and the remainder can be characterized as just a return of your original investment and thus, would not be taxable.

Follow-up with additional information if necessary.  

@Justin202203

[Justin202203]

Hi Gorge,

I will follow up with previous CPA regarding $5000 loss of 2018.

I still have another question regarding this settlement, when I invested $50,000 to the partnership in 2013, it costed me $52,000 totally, and the $2000 is syndication fee, this $2000 syndication fee was never deducted as expense for my investment, can I deduct it from the settlement $8000?

Thank you very much.

[AliciaP1]

The Syndication Costs should have been capitalized by the partnership and amortized.  Any remaining costs at the close of the partnership are not deductible.  You would have seen the amortization expense for these on your previous K-1s, likely totaled with any other amortization costs.

@Justin202203