Reporting a payout from a law suit settlement on my 1040.

[streetwolf]

Greetings...

I was just awarded $54,000, but haven't received it yet, as a plaintiff in the Bayer Roundup weed killer cancer causing law suit.  While not technically a class action suit it is similar I was told. I developed a form of leukemia after using the product for many, many years.  As far as I know I get 60% and the lawyers get 40%.  Out of my 60% any administrative costs will be deducted (Lawyers.. you got to love them).

So... the $54,000 question is how will I be reporting this on my Federal 1040 for 2021?  I assume I have to pay taxes on some part of this.  The whole $54,000 or just the actual amount I receive after the lawyers take their cut?  Also, what about reporting it on my state 1040 form?  I live in New Jersey.

I'd greatly appreciate any help on this matter from the community but especially any CPA's or tax preparers that know the IRS codes about my situation.

Thank you.

[Critter-3]

From Opus 17:

Generally speaking, payments for personal injury or property damage are not taxable, but recoveries for punitive damages or lost wages/income are taxable.

There are a number of variations (like, if you deducted medical expenses in a prior year that are now paid off by the settlement, you have a report a reimbursement of a deduction, and that is taxable.  Or, if you received money for your damaged car and the money is more than the car was worth, the excess is taxable).  This link provided gives more examples.   http://www.irs.gov/pub/irs-pdf/p4345.pdf

Your attorney costs are deductible, but only as far as the damages are taxable (if 50% of your damages are taxable, then 50% of your fees are deductible).  And they are a miscellaneous deduction subject to the 2% rule, so you may or may not actually benefit from claiming the deduction.

In a perfect world, you would receive a 1099-Misc from the payer that only lists the taxable part (wages and such).

https://ttlc.intuit.com/questions/1901380-entering-an-award-from-a-legal-settlement-in-turbotax

[streetwolf]

Thanks for the quick reply. 

As I said the lawsuit is sort of a class action thing.  There were something like 100,000 folks who signed aboard.  Bayer decided to settle instead of having to go to court.  I don't know if getting cancer constitutes a physical injury.  I've made no deductions for medical treatment related to my cancer. My gut feeling is that the settlement was more punitive as Bayer admits no responsibility for Roundup causing cancer. Would you agree it's probably punitive therefore I would have to pay tax?

If I do get a 1099-Misc will that have all the info I need to file my taxes correctly if they only include what I actually received from the settlement?  My wife used to work as a manager of  accounts payable at a large company and when she had to cut a settlement check and issue a 1099-MISC it was only for amount actually received.   I suppose this would be the best thing to happen as you stated.

[Critter-3]

Ask the attorney if a 1099-misc will be issued. 

[rjs]

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@streetwolf wrote:

My gut feeling is that the settlement was more punitive as Bayer admits no responsibility for Roundup causing cancer. Would you agree it's probably punitive therefore I would have to pay tax?

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The settlement document should say whether it's compensatory or punitive. If not, ask your highly-paid lawyer.

[Opus 17]

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@streetwolf wrote:

Thanks for the quick reply. 

As I said the lawsuit is sort of a class action thing.  There were something like 100,000 folks who signed aboard.  Bayer decided to settle instead of having to go to court.  I don't know if getting cancer constitutes a physical injury.  I've made no deductions for medical treatment related to my cancer. My gut feeling is that the settlement was more punitive as Bayer admits no responsibility for Roundup causing cancer. Would you agree it's probably punitive therefore I would have to pay tax?

If I do get a 1099-Misc will that have all the info I need to file my taxes correctly if they only include what I actually received from the settlement?  My wife used to work as a manager of  accounts payable at a large company and when she had to cut a settlement check and issue a 1099-MISC it was only for amount actually received.   I suppose this would be the best thing to happen as you stated.

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Yes, cancer counts as a physical illness or injury, and the settlement is at least partly for that injury.  Since this is a voluntary settlement, it is unlikely that any portion represents punitive damages (since that would require a finding of fault) or interest (since that would also require a court finding).  *Punitive means punishment.  A company would never voluntarily pay punitive damages because that would be admitting wrongdoing.  They might be forced to pay punitive damages in a jury trial, but I would not expect voluntary punitive damages.  Compensation for lost wages or lost income due to being out of work would also be taxable.  But your attorneys would know for sure.  I suspect this is purely on the cancer angle.

If you previously paid cancer-related medical expenses from a tax-free HSA or MSA or FSA, that portion of the settlement is a taxable recovery (since it is a reimbursement of a past deduction).  if you previously deducted your cancer-related medical expenses as itemized deductions on schedule A, then a portion of the settlement may be taxable under the "tax benefit rule".  Rather than explain all these things in detail now, I'll let you ask the follow up question IF you did in fact pay for your medical expense in one of these ways.  

I would expect a 1099-MISC to be issued because the payor can't take responsibility for the specific tax situation of every payee.  It's up to you to deal with the paperwork.  There are three ways of handling a 1099-MISC for income you believe is non-taxable.

1. The IRS recommended way.  Don't add the 1099 to your tax return.  File by mail--don't e-file.  Attach a copy of the 1099 and a letter of explanation as to why the income is non-taxable.  Don't attach other proof at this time, but keep proof for at least 3 years, since the IRS may send a letter asking for more details.
2. How to still e-file. Add the 1099 to your tax return under "other uncommon income", then add a second item of "other uncommon income" in a negative amount to offset the settlement.  Call it "non-taxable settlement adjustment."  You can e-file.  The IRS may send a letter asking for an explanation of this negative income item, then you would send a letter of explanation with copies of your proof.
3. The lazy way.  Leave the 1099 off your return and make no adjustment.  You will guaranteed get a letter explaining you skipped some income, and assessing back taxes and penalties.  You would reply with a copy of the 1099, your letter of explanation, and other proof of the settlement and your cancer.  I don't recommend this, because you don't want to get this letter.

In all cases, keep documentation of your diagnosis and the lawsuit for at least 3 years from the filing date (April 15, 2022) and preferably keep your documents for 6 years. 

[Mike9241]

likely part would be compensatory and the rest would be punitive.  sorry to say that the Tax Cuts and Jobs Act of 2017 eliminated the deductibility of 2% itemized deduction which would include the legal fees on the taxable part of the settlement.

see this thread

https://www.cbsnews.com/news/monsanto-lawsuit-verdict-of-289-million-roundup-case-could-evaporate-to... 

[streetwolf]

Since my official diagnosis of cancer in March of 2015 I haven't incurred any medical costs which I took a deduction for. No FSA, HSA, or MSA. The type of cancer I have is very slow growing and only requires a visit to my Hematologist/Oncologist every 4  months with payment of a low copay with my insurance.   I haven't been able to meet the percentage of my income that allows me to take medical deductions in a very long time.

Do you really think it's physical and I won't have to pay taxes on what I receive based on what I presented?

[Opus 17 · Accepted solution]

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@streetwolf wrote:

Since my official diagnosis of cancer in March of 2015 I haven't incurred any medical costs which I took a deduction for. No FSA, HSA, or MSA. The type of cancer I have is very slow growing and only requires a visit to my Hematologist/Oncologist every 4  months with payment of a low copay with my insurance.   I haven't been able to meet the percentage of my income that allows me to take medical deductions in a very long time.

Do you really think it's physical and I won't have to pay taxes on what I receive based on what I presented?

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https://www.irs.gov/pub/irs-pdf/p4345.pdf

You should consult your attorneys or read your settlement documents carefully, but I think that this will likely be non-taxable.

1. Cancer caused by the company's product is very definitely a physical illness or injury.

2. I very much doubt the company would agree to pay punitive damages because that would be admitting wrongdoing.

3. If your claim is based purely on your diagnosis, then it's for an illness or injury.

I can imagine where the settlement might have a scale, like $10,000 for exposed people with no cancer, $75,000 for proven cancer diagnosis, and $150,000 for died of cancer.  In that case, the $10,000 for people who were exposed but not sick might be seen as being for emotional distress or pain and suffering, in which case it might be taxable.  But you have a diagnosis.  (Also important; compensation for pain and suffering is taxable if there was no original injury, but compensation for pain and suffering after an injury is not-taxable just like the injury compensation is non-taxable, so the fact that you have a diagnosis means the settlement should be non-taxable to you even if part of it is for fear, anxiety, uncertainty, etc.)

I can also imagine where the settlement might be something like $50,000 for a cancer diagnosis, plus $25,000 for every year of lost wages, and you submitted proof that your cancer caused you to lose work, to get the higher payout.  In that case, the lost wages portion would be taxable (and should be reported by the payor on a w-2). 

Without all the facts, no can tell you with 100% certainty.  Hopefully these principles will help you ask the right questions of your attorneys or find the right answers in the documentation. 

[streetwolf]

There were four tiers in the settlement.  The first one was a straight $5,000 award which I suppose required the least proof.  The second one was also a Tier 1 which was up to $45,000.  Tier 2, which I am in, ranges from $45,000 to $75,000.  Tier 3 the highest is from $75,000 to $175,000. Being in a particular Tier required me to meet certain requirements as determined by the settlement administrator.

There was no loss in wages as I've been retired before the diagnosis.

[macuser_22]

As others have said - it depends on the terms of the settlement.   Nobody here can see the court documents to determine if it is taxable or not.    Talk to your attorney or consult a tax attorney who can look at your documents and court records and give you an accurate answer.   Strangers on the internet can only guess.

[Opus 17]

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@streetwolf wrote:

There were four tiers in the settlement.  The first one was a straight $5,000 award which I suppose required the least proof.  The second one was also a Tier 1 which was up to $45,000.  Tier 2, which I am in, ranges from $45,000 to $75,000.  Tier 3 the highest is from $75,000 to $175,000. Being in a particular Tier required me to meet certain requirements as determined by the settlement administrator.

There was no loss in wages as I've been retired before the diagnosis.

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As long as the only requirements you had to meet were medical (and because you never took previous tax deductions per your response), the settlement should be non-taxable as I discussed above. 

[streetwolf]

Guess I better just wait for the final settlement documents and payment.  Who knows it might not even happen this year. All of you have been very helpful. 

[streetwolf]

I received my settlement papers for my lawsuit as well as an initial check for $10,400.  About $21,000 is being held as a medial lien until it is determined if anyone else is entitled to a piece my settlement award.  This part of the process is being handled by a company called Archer Systems whom I understand is on my side and will do it's best to get as much of the lien back to me.

The settlement papers do not mention anything regarding any tax liability I might have.  All it says is to contact a tax professional.  I don't see the settlement papers helping a tax specialist at all.  Am I missing something on my settlement paper that would indicate if the award is taxable or not?  Could the medical lien be an indication that the award is non-taxable?

The settlement award as previously  mentioned is for a physical sickness; cancer.  According to the representative of the law firm physical sickness rewards are non-taxable.  As far as I can tell from several IRS publications I only have to include as income any medical deductions I took for the treatment of my cancer pro-rated from the beginning of it.  I have never taken any deductibles as I never met the 7.5% requirement for health deductions.

I asked my law firm rep if I would be receiving any forms like a 1099 and he said probably not.  Can this be true?  If I get no forms I suppose I just don't enter my award on my tax form?

 As it stands for now I will assume my award is not reportable as income. Any more advice would be appreciated.

[DianeW777]

Yes it is true.  If you received an award through law suit settlement and it was for medical reasons.

Physical injury or sickness settlements (dog bites, mesothelioma, etc. or cancer) are nontaxable and don't need to be reported unless you deducted medical expenses related to the injury on a previous tax return and you received a tax benefit from the deduction. In that case, report the medical expenses related to the incident as miscellaneous (other) income.

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