Entering an Award From a Legal Settlement in TurboTax

There are two primary steps in entering proceeds from a legal settlement:

1. Determine if the award, or a portion of it, is taxable
2. Entering the taxable amount Into TurboTax

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 these 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 these instructions below.
• Punitive damages - Amounts are taxable and should be reported as “Other Income” using these 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 these instructions below.
• Employment discrimination or injury to reputation - Amounts are taxable and should be reported as “Other Income” using these 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 these instructions below. 

There are three categories of income from legal settlements that are entered into your tax return:

1. Interest

 - 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:

Here's how to get to the 1099-MISC screens in TurboTax Online:

1. Select the Tools button in the upper right-hand portion of the screen. 
2. Select Topic Search. 
3. When the window opens, type "1099-misc" into the box, select “1099-MISC Other Income”, and then select Go. 
4. Follow the on-screen instructions to enter the information.

Here's how to get to the 1099-MISC screens in TurboTax Desktop:

1. Enter your cursor into the search box in the upper right-hand portion of the screen. 
2. Type "1099-misc" into the box, select “1099-MISC Other Income.” 
3. Follow the on-screen instructions to enter the information.