First you need to determine if your settlement is taxable. Legal settlements are often taxable, but it depends on the type of settlement. The settlement type will be listed in your Final Settlement Agreement.
- Physical injury or sickness settlements (dog bites, mesothelioma, etc.) 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.
- Punitive damages (except certain wrongful death cases), and awards for employment discrimination and injury to reputation (libel, slander, or defamation) are taxable.
- Emotional distress and mental anguish settlements are taxable (unless they're related to physical injury or sickness), but only on the amount above and beyond the 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.
To report the settlement, with no Form 1099-MISC, in TurboTax Online, while working in your return:
- Click on "Tax Tools" on the far left of your screen *
- Click on "Tools"
- Click on "Topic Search"
- Type in "Other Reportable Income"
- Answer "No" to "Did you receive any other wages?"
- On the next screen with "Let's Work on Any Miscellaneous Income", scroll to the bottom of the page
- Next to "Other Reportable Income" click on Start
- Enter a description (Legal Settlement) and the amount and click on Continue
Your "other income" will appear on Form 1040 Schedule 1, Line 8z and will flow to Form 1040 Line 8.
* If you don't see "Tax Tools" on your screen, click on any of the entry sections (e.g. Income, W-2) and then click on "start" or the pencil icon"
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