W-2 and 1099-misc for lawsuit

[KASpuhl]

I got a W-2 and a 1099-misc for a wage settlement lawsuit.  I have determined from the forums that both need to be entered in TT.  The numbers on the two forms look identical with respect to the total wages/total misc income.  However, when I enter the 1099-misc it asks me the amount that was for back wages. Would that be the whole amount or is there another figure to use (like an amount less taxes or something).

Thanks, KASpuhl

[MaryM428]

If the Form W-2 and the Form 1099-MISC both reported the same payments, then you will have to make an adjusting entry to prevent double-counting the income.

First, enter the W-2 in the Wages and Salaries interview of Federal Taxes > Wages and Income (or Personal Income). Enter it exactly as it was sent to you to ensure you get credit for the taxes withheld.

Then, enter the Form 1099-MISC in the Income from 1099-MISC interview in Wages and Income > Other Common Income.
 

Do NOT say the income was related to your work or career, that it involved an intent to make money or that it had been received in the past or expected in the future. Answering "Yes" to any of these questions will trigger self-employment taxes.

Finally, go to the  Other Reportable Income interview, the very last interview in Wages and Income  (Federal Taxes   >  Wages & Income >  Less Common Income  >  Miscellaneous Income ). (Or enter "other reportable income" in the Search Box and select "jump to other reportable income"). These payments are NOT wages).

 Enter the amount reported on the 1099-MISC as a negative number. This will cancel out the earlier 1099-MISC entry.

[Dawn Y1]

My husband also received a W-2 and a 1099-MISC form with identical amounts from the lawyers handling a class action discrimination lawsuit. It was explained to him that the W-2 was for back wages and the 1099-MISC was for non-economic damages (pain and suffering). From what I have read online, I believe this is income and is taxable. The 1099-MISC included Attorney fees. TurboTax is insisting the 1099-MISC be associated with a sole proprietorship business and wants me to create a Schedule C. I have read that this is unnecessary but I don't know how to get TurboTax to understand that. I found in the IRS 2020 tax instructions for 1040/1040-SR, that I can deduct the lawyer fees as UDC on Schedule 1 up to the amount of the gross income received in the settlement. I believe the gross income would be the amount on the W-2 plus the amount on the 1099-MISC. Let me know if I have interpreted anything incorrectly.

[DawnC]

The income is taxable but it is not self-employment and does not need Schedule C.    To get TurboTax to stop asking for Schedule C, you have to answer the follow-up questions as below.  You may want to delete the 1099-MISC and re-enter it as sometimes editing does not provide the desired outcome.   Re-enter the form and description, and mark the box when asked about uncommon situations - This money was from a lawsuit settlement.   Mark NO on the pop-up about back wages.   The W-2 has the wages portion of the settlement.  Be sure to enter the W-2 in the W-2 section of TurboTax.  

The attorney's fees you paid may be deductible.  If so, they are entered as an adjustment to income on the same line (Line 8 of Schedule 1) as the Form 1099-MISC income will be reported on.  The gross income from which the attorney's fees can be adjusted includes the amounts received for the unlawful discrimination/civil rights judgments.   Amounts collected for lost wages (W-2 amount), interest, or punitive damages are taxable and not deductible.    @Dawn Y1

Taxation of Legal Settlements

• Physical injury or sickness settlements (dog bites, mesothelioma, etc.) are non-taxable and don't need to be reported.  
• Punitive damages are taxable as are awards for employment discrimination and injury to reputation (libel, slander, or defamation).
• Emotional distress and mental anguish settlements are taxable unless you have undeducted medical costs for treatment of the distress or anguish. You'll need to paper-file your return so you can attach a statement that shows the settlement amount minus the (undeducted) medical expenses related to treatment.

You should receive a settlement statement that details the payments he received.  

[Dawn Y1]

I deleted the Miscellaneous Income form hoping to clear that entry out. I added it back being sure to answer that it was a lawsuit settlement and no back wages. TurboTax generated the Miscellaneous Income form again and again, when I do the check on the taxes, it flags an error because there is no Schedule C. 

I zeroed out the lawyer fees from Box 10 on the Miscellaneous Income form. When I checked for errors, no error was generated! It seems that if you enter lawyer fees (even though none of them are taxable), TurboTax wants the lawyer fees associated with a Schedule C. 

You mentioned I might be able to deduct the lawyer fees by adding it to line 8 on Schedule 1. I already have two entries there, one for the 1099-MISC income and the other is for the unemployment adjustment to income (-10,800) that TurboTax generated. In reading the 1040/1040-SR instructions, it says to put lawyer fees on line 21H and use the code UDC. Is that not the way to do it or is that just another option?

Thank you for your help.

[DaveF1006]

It depends. For some odd reason, Turbo Tax treats the reporting of 1099-MISC as a business and this shouldn't be. Here is a perfectly acceptable solution to report this and keep out of Schedule C Business income.

1. Log into or open Turbo Tax. Delete your 1099-MISC where you reported it.  i have another solution.
2. Go to federal>wages and income>less common income>miscellaneous income.
3. Other reportable income>start or revisit
4. When it asks for a description, enter Gross Income from 1099 MISC from Lawsuit and amount
5. Because of the tax bill passed at the end of 2017, attorney fees are no longer deductible thus the income on the 1099-MISC is fully taxable.

[macuser_22]

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@Dawn Y1 wrote:

My husband also received a W-2 and a 1099-MISC form with identical amounts from the lawyers handling a class action discrimination lawsuit. It was explained to him that the W-2 was for back wages and the 1099-MISC was for non-economic damages (pain and suffering). From what I have read online, I believe this is income and is taxable. The 1099-MISC included Attorney fees. TurboTax is insisting the 1099-MISC be associated with a sole proprietorship business and wants me to create a Schedule C. I have read that this is unnecessary but I don't know how to get TurboTax to understand that. I found in the IRS 2020 tax instructions for 1040/1040-SR, that I can deduct the lawyer fees as UDC on Schedule 1 up to the amount of the gross income received in the settlement. I believe the gross income would be the amount on the W-2 plus the amount on the 1099-MISC. Let me know if I have interpreted anything incorrectly.

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Only discrimination lawsuits can deduct attorneys fees, but TurboTax does not support that, but it can be entered in the "forms mode" but only the CD/download version installed on a Mac or Windows computer has the forms mode.

==============================

If this is an employment discrimination then legal fees are a "above the line" deduction that TurboTax does not support in the interview.

This deduction cannot be claimed using the online version.

It can only be entered in the forms mode in the CD/download desktop version directly on the 1040/ 1040SR Worksheet for Schedule 1 line 22.

in the smart worksheet line H enter the code UDC and the amount.

That will put it on the 1040 form line 10 as a deduction to income.

Per the IRS 1040 instructions page 94.

[quote]
Line 22
Include in the total on line 22 any of the following write-in adjustments. To find out if you can take the deduction, see the form or publication indicated. On the dotted line next to line 22, enter the amount of your deduction and identify it as indicated.

•Attorney fees and court costs for actions involving certain unlawful discrimination claims, but only to the ex-tent of gross income from such actions (see Pub. 525). Identify as “UDC.”
[end quote]



\https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

[Dawn Y1]

The 1099-Misc was for a discrimination lawsuit. I have added the attorney fees on line 22H on Schedule 1 as UDC. I guess all I can do is ignore the TurboTax error when I do a final check on the taxes. It looks all OK on the forms, I just keep getting the TurboTax error on the Miscellaneous Income form for the Schedule C for the lawyer fees.

[macuser_22]

It is entered on Schedule 1 and indicates, not on schedule C.   Schedule C is for self-employed income.

[KASpuhl]

This didn't work for me. I tried entering the negative number and it wouldn't let me file.  It didn't ask for a Schedule C.  Maybe I did something wrong.  Too late now since I filed already

[Dawn Y1]

By entering a 1099-MISC, TurboTax creates a Miscellaneous Income Form. This form says that the Income is Other Income. However, the lawyer fees are in Box 10. Box 10 on the Miscellaneous Income Form asks (TurboTax requires) for a Schedule C. Is this an error in TurboTax or on the 1099-MISC? Should the lawyer fees be in a different box? Anyway, TurboTax would not let me submit the return without a Schedule C. I created a dummy Schedule C.  I purchased Audit Defense.

[MsRK]

Actually, even after 2017 tax reforms, *CERTAIN* narrow types of attorney's fees can still  be deducted above-the-line, particularly if the attorney's fees were part of an award/judgment pursuant to certain civil rights litigation (see https://www.americanbar.org/groups/business_law/publications/blt/2019/11/gross-recoveries/). 

However, the IRS did indeed do away with the lines on Schedule 1 form 1040 to make those deductions straightforward, which they're now very messy. I recently received a judgment against a former employer for wrongful termination/discrimination under the Americans with Disabilities Act, for which the court/judge specifically awarded attorney's fees in addition to back pay and compensatory damages (pain and suffering). However, the unscrupulous former employer then issued one 1099-MISC lumping everything together, including the attorney's fees that were paid directly to the attorneys pursuant to this civil rights claim.

The IRS no longer makes it straightforward as to how to list that "above-the-line deduction" for attorney's fees on 1040 Schedule 1, BUT NEITHER DOES TURBO-TAX/INTUIT. And that's what I'm struggling to figure out now...

[macuser_22]

---

@MsRK wrote:

Actually, even after 2017 tax reforms, *CERTAIN* narrow types of attorney's fees can still  be deducted above-the-line, particularly if the attorney's fees were part of an award/judgment pursuant to certain civil rights litigation (see https://www.americanbar.org/groups/business_law/publications/blt/2019/11/gross-recoveries/). 

However, the IRS did indeed do away with the lines on Schedule 1 form 1040 to make those deductions straightforward, which they're now very messy. I recently received a judgment against a former employer for wrongful termination/discrimination under the Americans with Disabilities Act, for which the court/judge specifically awarded attorney's fees in addition to back pay and compensatory damages (pain and suffering). However, the unscrupulous former employer then issued one 1099-MISC lumping everything together, including the attorney's fees that were paid directly to the attorneys pursuant to this civil rights claim.

The IRS no longer makes it straightforward as to how to list that "above-the-line deduction" for attorney's fees on 1040 Schedule 1, BUT NEITHER DOES TURBO-TAX/INTUIT. And that's what I'm struggling to figure out now...

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Answered above.   See my prior post of 4-8-2021 at 5:47 PM for how to enter that.   That is not supported in the TurboTax interview but can be entered in the desktop version forms mode as I posted.

And IRS Pub 525 page 32 tells how to report it.

https://www.irs.gov/pub/irs-pdf/p525.pdf

[CJbrandnewme]

On a 1099 MISC do I put the total amount, or do I put the amount received after attorneys fee’s?

[AamilD]

You will put the total amount and you will input it exactly as stated on 1099-MISC. Because of the tax bill passed at the end of 2017, attorney fees are no longer deductible thus the income on the 1099-MISC is fully taxable.