Received 1099-MISC for Nontaxable Damage Claim Settlement

[JackSpaniel]

Hi,

I filed a claim with the state Department of Transportation for damage to my vehicle due to state's negligence in removing snow and ice from the roadway in winter of 2025.  They honored the claim for the full $700 after I signed the release.  I just received a 1099-MISC for this $700 even though it was purely for body damage to my car based on the repair shop estimate.  My understanding is property damage reimbursement of this kind is non taxable.  When I pop the 1099-MISC into Turbotax of course it treats it as taxable.  What to do?  Thanks in advance!

[ReneV4 · Accepted solution]

To report your 1099-Misc and also include an offsetting entry due to a property damage claim, do the following:

1. Go to Wages & Income, select Add more income and scroll down to Other Common Income
2. Click the down arrow and select Form 1099-Misc, click Start or Revisit
3. Enter your 1099-Misc exactly as it appears on the original Form 1099, click Continue
4. In the "Describe the reason for this 1099-Misc", write a description in the box (Remember the description for later)
5. Select "None of these apply" on the next screen and click Continue
6. Answer the additional questions and click Continue

When back at the "What you have so far" screen, click Add more income

1. Scroll down, but this time, go to Less Common Income
2. Click the down arrow to the right of Miscellaneous Income, 1099-A, 1099-C and click Add 
3. Scroll down to the bottom and select Start to the right of Other reportable income
4. Click Yes when you reach, Any other taxable income?
5. Click Add and here you will enter the description you wrote above, along with a negative (-700), Continue

The above steps will report the 1099-Misc, as required, but will also reverse the amount, since it was only to cover damages.

[JackSpaniel]

@ReneV4 

Thanks so much, this is extremely helpful! One last question: is it better to do what you suggested here or to ask state Dept of Transportation to send me an amended 1099-MISC showing $0 as opposed to $700 (not sure they will do that).

[Vanessa A]

You may want try to do both.  Even if the DOT will send you another one, it would likely take a while (or not happen at all) and since you would be completing your return showing that this was not taxable income by taking the steps above suggested by Rene, having them correct theirs will just support your claim that it is not taxable.  

Be sure to keep records and receipts for what happened and why it is not taxable income with your tax return in case they would question anything. 

[cbsprings]

i am stuck after entering the 1099-misc form and describing the reason. I cannot find "add more income" or scrolling down to "less common income". Is this from the 2024 turbo tax software? Thanks in advance for your explanation.

[LindaS5247]

Income reported on Form 1099-MISC is generally considered self-employment income if it represents payment for services provided as an independent contractor or freelancer.  TurboTax will guide you through the process of entering your miscellaneous income. 

Income reported on Form 1099-MISC is not considered self-employment income when it represents passive income. Such as; prizes, awards, or legal settlements rather than payment for your services rendered. This income is reported on Schedule 1 (Form 1040) as "Other Income" rather than Schedule C. It is likely that your damage claim falls into this category.

To manually enter your Form1099-MISC:

1. Click on "Search" at the top right of your TurboTax screen.
2. Type "Form 1099-MISC" in the search box.
3. Click on the link "Jump to Form 1099-MISC"
4. Your screen will say, "Did you get a 1099-MISC?" Click on Yes
5. Your screen will say, "Let's enter the income from your 1099-MISC"
6. Enter your details as shown on your form.  Enter it under Other Income if it is not Rents or Royalties and Continue
7. Your screen will say "Describe the reason for this 1099-MISC" enter a brief description such as Nontaxable damage claim settlement and Continue
8. Your screen will say," Do one of these uncommon situations apply?" Review this list and if none apply, check None of these apply. And Continue
9. Your screen will say, "Did the XXX involve work that's like YOUR NAME main job?" Answer No if this was a one-time referral bonus and not related to your main  job. 
10. Your screen will say, "How  often did YOUR NAME get income for XXXXX? Answer and Continue
11. Your next screen will say, "Did the RXXX involve an intent to make money?" If No, your entry is complete. It is likely your damage claim settlement will fall into this category. If Yes, your income will be entered on Form Schedule C as Self-Employed Income.
12. Continue through your TurboTax screens and answer all follow-up questions regarding your income.

Then you will enter an offsetting entry to show that the income is nontaxable.

1. Scroll down, but this time, go to Less Common Income
2. Click the down arrow to the right of Miscellaneous Income, 1099-A, 1099-C and click Add
3. Scroll down to the bottom and select Start to the right of Other reportable income
4. Click Yes when you reach, Any other taxable income?
5. Click Add and here you will enter the description you wrote above, along with a negative (-$XXX  So for example, if your settlement you entered above is $1000 enter -1000), and Continue

Click here for information on Form 1099-MISC. 

Click here for "Where Do I Enter Form 1099-MISC?" 

Please feel free to come back to TurboTax Community with additional information or questions.