I received 1099-misc for nontaxable lawsuit settlement. TurboTax calculating tax. I put amount in box 7, said it was lawsuit settlement not for wages, but tax calculated.

[Hal_Al]

Why do you think it is nontaxable? Getting a 1099-Misc usually means it is taxable. What did you get this money? By "I put amount in box 7" do you mean the 1099-Misc you received had the money in box 7? If not, what box was it in?

[craigsgordon]

Thank you. Yes, the funds were put in box 7. This was a nontaxable lawsuit settlement not associated with wages, punitive damage, or anything else that would trigger a taxable event.

[Hal_Al]

You still haven't said why you DID get the money. All income is taxable unless the tax law specifically exempts it (e.g Veterans benefits).
According to the tax code, the only damages you can enjoy tax-free are those that compensate you for physical injury or physical sickness. (26 U.S.C. § 104(a).)
References:
<a rel="nofollow" target="_blank" href="https://www.nolo.com/legal-encyclopedia/question-won-lawsuit-pay-tax-award-28353.html">https://www.n...>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf">https://www.irs.gov/pub/irs-utl/laws...>

[craigsgordon]

It was a payment from an insurance trust where my wife was supposed to receive a portion of the insurance but instead had to sue for it.

[craigsgordon]

The settlement agreement says "The Settlement Payment shall be made free of any
income, gift or estate tax to the payees"

[Hal_Al]

Settlement agreements cannot make money nontaxable. Taxability goes by IRS rules and tax law. What sometimes  happens is the award is just increased to give you additional money to pay the taxes.
Taxability probably goes back to reason the insurance company originally funded the trust

[Hal_Al · Accepted solution]

If you received an erroneous 1099-Misc

You have several choices:

1. Ideally, you get a corrected 1099-misc from the payer

2. Don't report it on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.

3. Report the Income on schedule C and take a deduction, for the same amount, under other expenses

4. 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.

5. Do nothing and hope you can explain it away when & if the IRS contacts you

[KPChin]

I have a similar situation.  I received settlement monies for a defamation claim and received a 1099 MISC Box 7 filled in with the settlement amount.  On my 1040, TT put it on line 21- Other Income with "Settlement Income" from 1099MISC.  However, I just received a proposed change notice from the IRS where they also added the Self Employment taxes.  I thought defamation was in the category of Ordinary Income and not subject to SE taxes.  Thoughts anyone?

[TomD8]

@KPChin You reported the income correctly.  The problem is that your 1099-MISC was completed incorrectly by the payer.  Your settlement income should have been reported in Box 3 of the 1099-MISC, not Box 7.  (Income reported in Box 7 is regarded by the IRS as self-employment income.)

You should try to obtain a corrected 1099-MISC from the payer.  Alternatively, contact the IRS using the contact information on the notice you received, and explain the situation.

[TaxWealthnotsalary]

I can´t find the TAB mentioned:  Can you please explain further.. thanks. 

" 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"

[Hal_Al]

This is an old post referring to 2107 and earlier tax returns.  For 2019, the entries go on line 8 of Schedule 1, not line 21 of form 1040.

If you received an erroneous 1099-Misc

You have several choices:

1. Ideally, you get a corrected 1099-misc from the payer

2. Don't report it on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.

3. Report the Income on schedule C and take a deduction, for the same amount, under other expenses

4. Report the income as other income (enter in TurboTax at the 1099-Misc screen) on line 8 of Schedule 1.  Then enter a line  8/Schedule 1 deduction, for the same amount.  In TurboTax (TT), enter at:
- Federal Taxes tab
 - Wages & Income
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.

5. Do nothing and hope you can explain it away when & if the IRS contacts you

[gelp1025]

When you receive a 1099-MISC and the income is recorded in box 7, you have to pay social security tax on the income in addition to federal tax; however, the money the person in this situation received was not "wages, and therefore, the payment should have been recorded in box 3 as "other income", to rightfully make them responsible for only federal tax, which is what has happened to me and how I found this post.  I've asked the payer to make the correction, in my case the money received was from a lawsuit settlement, which is also "other income", verified by the CPA doing my taxes, but the payer is ignoring me, so with the deadline coming up and no corrected 1099-MISC, I also need to know what to do.

Thank you to the Intuit Tax counselor who posted the suggested solutions.  

[Critter-3]

The path of least resistance is the #3 Sch C route ... it suits your purpose and has the least rate of IRS questioning. 

[Hal_Al]

From the IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly. You cannot efile with an attachment. You will have to mail in your return.

The key to getting TurboTax to treat it as other income is to follow these steps:

 Enter the 1099-Misc

On the next screen Describe what the payment was for

On the next screen select "none of these apply"

On the next screen select "No it didn't involve work like my main job"

On the next screen select "I got it in 2019" ONLY

On the next screen select No, it didn't involve intent to earn money

TT will put the amount on line 8  of Schedule 1 as other income