, Answering FAQ'sTurboTax Employee
There are two primary steps in entering proceeds from a legal settlement:
- Determine if the award, or a portion of it, is taxable
- Entering the taxable amount Into TurboTax
Determining if an Award is Taxable
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.
- Physical injuries or physical sickness settlements are generally non-taxable. However, if you deducted any of the medical expenses related to the injury, the amount of the tax benefit you received from the deduction is taxable. This amount should be reported as Other Income using the instructions below.
- Interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable.
- Interest - Amounts on any settlement are taxable as Interest Income and should be reported using the instructions below.
- Punitive damages - Amounts are taxable and should be reported as Other Income using the instructions below. 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 require that you print and file your return. The net taxable amount should be reported as Other Income using the instructions below.
- Employment discrimination or injury to reputation - Amounts are taxable and should be reported as Other Income using the instructions below.
- 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 are reported using the instructions below.
Entering an Award In TurboTax
There are three categories of income from legal settlements that are entered into your tax return:
- The interest from an award is generally taxable and is entered in the same way as interest received on a Form 1099-INT. Use the information that you have available. The article, Information about Form 1099-INT, has instructions on entering interest income in TurboTax.
2. Loss-of-use or loss-in-value of property
- An award that is less than your cost basis is generally not taxable. If it is not taxable then it doesn’t need to be entered.
- 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. 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.
3. Other income that is not 1 or 2 above
- This type of award is entered as other income in TurboTax. TurboTax uses the boxes on Form 1099-MISC to enter information on your tax return - even if you don't have an actual 1099-MISC. Use the information that you have for entering data into TurboTax.
Follow these instructions for entering 1099-MISC information:
- Select the Federal Taxes tab (the Personal tab in the Home & Business edition).
- Select the Wages & Income subtab, click on I'll choose what I work on.
- Scroll down the Wages & Income screen until you see the Other Common Income group.
- Click on the Start/Update button to the right of the Income from Form 1099-MISC category.
- Follow the on screen instructions.