Insurance settlement for wage loss, taxable?

[karentemail]

Hello Turbotax Intuit community experts:

I received a check from insurance company, part of the settlement is for my wage loss, will that part be taxable? If so, will should I enter it  (there is additional income section, not sure if it should be under "household employee" or "sick pay"?) Thank you very much! 

[Mike9241]

If this is a workers compensation claim read this. 

https://workerscompensationexperts.org/blog/workers-compensation-taxes/ 

[karentemail]

Thanks, not worker's compensation, but the when the insurance calculate the settlement, part of it is for my loss of work (for few weeks), thanks!

[DavidD66]

There are two primary steps in entering proceeds from a legal settlement:

1. Determine if the award, or a portion of it, is taxable
2. Entering the taxable amount Into TurboTax

You first need to know the type of settlement to determine the taxable portion. You determine the type of settlement from your Final Settlement Agreement. The types of settlements are:

• Physical injury or physical sickness,
• Interest earnings on a settlement amount,
• Punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation, and
• Settlements for loss-of-use or loss-in-value of property.

Refer to your settlement award section below for taxable/non-taxable information, and how to enter it in TurboTax.

Physical Injury or Physical Sickness Awards 

Awards for physical injuries or physical sickness settlements are generally non-taxable. Amounts you have not previously deducted are generally not taxable, and are not entered on your tax return.

However, if you have already deducted any of the medical expenses related to the injury on previous tax returns, the amount of the tax benefit you received from the deduction is taxable. This amount should be reported as Other Income.

TurboTax uses the boxes on Form 1099-MISC screens to enter information on your tax return - even if you don't have an actual 1099-MISC. Use the settlement information that you have and what you previously deducted to enter your information into TurboTax.

In TurboTax Deluxe or higher editions, jump to the entry area for physical injury or physical sickness settlements:

1. Click on Search and type in 1099-misc other income in the TurboTax search box, then press the Enter key or click the jump to link.
2. On the Did you get a 1099-MISC? screen, click Yes, OR, if you already entered another 1099-MISC,
   On the 1099-MISC Summary screen, click Add Another 1099-MISC button.
3. Answer Yes on the Did you get a 1099-MISC? screen.
4. On the Let’s enter the info from your 1099-MISC screen, use your settlement information to fill in the 1099-MISC boxes as if you had a form.
   The tax benefit amount you have previously claimed is entered in box 3 - Other income. Click Continue when done.
5. Enter a description for your settlement deduction and click Continue. 
6. On the Does one of these uncommon situations apply? screen, check the This money was from a lawsuit settlement button, then answer the back wages question.
7. Click Continue to finish.

Interest earned on Settlement Awards 

Interest earned on settlement awards are generally taxable, and should be reported as interest income in TurboTax Basic or higher editions.

The interest from an award is entered in the same way as interest received on a Form 1099-INT. Use the information that you have available.

In TurboTax Basic or above, jump to the interest income entry.

1. Enter 1099-int in the TurboTax search box and press the Enter key or click the jump to link.
2. On the Did You Receive Any Interest Income? screen, click Yes. 
3. Continue to the Enter Your Interest Income screen, and enter your interest earnings.

For more information, see Information about Form 1099-INT.

Punitive damages, emotional distress or mental anguish, and employment discrimination or injury to r... 

Awards for punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable. Each of these is handled as Other Income in TurboTax Deluxe or higher editions:

• Punitive damages – Amounts are taxable. It does not matter if punitive damages are related to a physical injury or physical sickness.
• Emotional distress or mental anguish – Amounts are taxable to the extent that they exceed medical costs (not previously deducted) for treatment of emotional distress or mental anguish.
  A statement showing the entire settlement amount less related medical costs should be attached to the return. This requires that you print and file your return.
• Employment discrimination or injury to reputation – Amounts are taxable.

TurboTax uses the boxes on Form 1099-MISC screens to enter information on your tax return, even if you don't have an actual 1099-MISC. Use the settlement amount you have and any previous deductions related to the settlement to enter your information.

In TurboTax Deluxe or higher editions, jump to the entry area for these types of settlements:

1. Click on Search and enter "1099-misc other income" in the TurboTax search box, then press the Enter key or click the jump to link.
2. On the Did you get a 1099-MISC? screen, click Yes, OR, if you already entered another 1099-MISC,
   On the 1099-MISC Summary screen, click Add Another 1099-MISC button.
3. Answer Yes on the Did you get a 1099-MISC? screen.
4. On the Let’s enter the info from your 1099-MISC screen, use your settlement information to fill in the 1099-MISC boxes as if you had a form.
   Taxable amounts, including any tax benefit deduction you previously claimed, is entered in box 3 - Other income. Click Continue when done.
5. Enter a description for your settlement deduction and click Continue. 
6. On the Does one of these uncommon situations apply? screen, check the This money was from a lawsuit settlement button, then answer the back wages question.
7. Click Continue to finish.

Settlements for loss-of-use or loss-in-value of property 

Settlements for loss-of-use or loss-in-value of property may be taxable if the settlement exceeds your adjusted cost basis in the property.

• Property settlements 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.
• When property settlements exceed your adjusted basis in the property, the excess is gain. Gains on personal capital assets and business property is taxable.

A taxable award that is greater than your cost basis is similar to selling the affected property. The award is the sales price and the cost is your cost basis in the property. TurboTax treats this situation the same way as:

• Selling Capital Assets Investment income on Schedule D (TurboTax Premier or higher editions). The article, Information about Investment Sales on Form 1099-B provides information on entering investment income from Form 1099-B for “Stocks, Employer Stocks, Other” in TurboTax.
• Selling Business Property (TurboTax Home & Business and Business) on Form 4797. The section on “Selling or Disposing of Depreciable Assets” in the article TurboTax Business Depreciation & Section 179 Deduction Help Center provides guidance for entering this information in TurboTax.

[karentemail]

Thank you for the explanations! However, the "settlement" does not involve lawsuit, nor it provides 1099, it is just a check with an amount given to me; However, that insurance agent specified told me how she calculated: part of it is from the wage loss I would have earned if I would have worked during these times. Just wonder if those should be taxable ? Thank you! 

[MaryK4]

Yes, because they are considered "wage replacement" you must pay not only the income tax, but social security and Medicare as well.  @karentemail 

[karentemail]

Thank you! How do I pay for SSI and Medicare with such? @MaryK4 

[ee-ea]

@karentemail 

W-2's were to be mailed by Jan 31.   One may be on the way to you.   Ask if one was sent.

[karentemail]

Thanks @ee-ea , I received my W-2 from my employer, however that "wage replacement" was issued by a check by the insurance company, they will not have W-2 for me