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It depends on the type of settlement proceeds you received and what they represented. If you received punitive damages, this would be taxable income, and often a Form 1099 would be issued.
Property settlements for loss in value of property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement. If the property settlement exceeds your adjusted basis in the property, the excess is income.
See IRS Publication 4345 for more information.
Thank you, Monika. Does it make a difference if this was a settlement out of court?
It feels like the category that best applies to this is wrongful death, which I believe is not taxable. I've also been told that dogs are looked at as property, and not companions, and this may be viewed as property damages, which feels like you may have been referring to at the end?
Did you receive a tax form? You should have a Final Settlement Agreement which will indicate the type of settlement you received. The type of settlement is what dictates the tax treatment. See Taxability of Legal Settlements. To enter a taxable legal settlement, see How do I enter a legal taxable settlement?
I received a W9, but not a final settlement agreement. I've actually yet to receive any payments, but the other party has agreed to settle before going to court.
A lot of very good advice was presented earlier. In response to your latest post, any taxable event (for punitive damages which the payer accurately considers taxable and reports that way) would be allocable to the year in which it’s actually received by you. So although it’s been in the works, it looks like it will be going on your 2023 tax return a year from now.
I’m sorry to hear about your dog, dussellrott!
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