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Bill, Enrolled Agent
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I received an out of court settlement for an EEOC issue and ...

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I received an out of court settlement for an EEOC issue and I received 40,000 from that settlement. Of that 40,000 I received 7400 for back wages for which I was sent a w-2 by the company. I also received a lump sum of 19400 and my attorney got the rest of the 40,000 (12,700). I got a 1099-Misc for the 19400 but it shows it in box 7 and after reading all I can find on settlements it looks to me like I should have received a 1099-misc with the money I was given put into line 3 as I have to claim in on my 1040 as other income which would mean it has to be on line 3 of the 1099-misc else line 7 is self-employment income and cannot be put on the other income line off the 1040.Can anyone tell me which way is correct? Also, after more reading, it appears that I have to claim the entire 40,000 as income minus attorney fees in the itemized deductions schedule A area, so if that is the case, shouldn't my 1099-misc show the entire amount somewhere on it that I received and not just the 19,400?
Submitted: 6 years ago.
Category: Tax
Expert:  Bill replied 6 years ago.

I agree that the amount should be entered in box 3 rather than box 7. If you can't get them to issue a corrected 1099 then attach an explanation with your tax return and report the income on line 21 of Form 1040. If you were including the total settlement of $40,000 on your return and the settlement was related to unlawful discrimination then you could take the legal fees as an adjustment to income on line 36. However, since they are not reporting the entire settlement, deducting the legal fees would not be prudent. The following links discuss these issues in detail.

See page 29 - http://www.irs.gov/pub/irs-pdf/p525.pdf

http://www.weitzlux.com/irs/freetaxeslawsuitsettlementirs_928.html#Chap9

http://www.nhbar.org/publications/display-news-issue.asp?id=2771

http://www.irs.gov/govt/fslg/article/0,,id=112716,00.html

http://www.irs.gov/irb/2006-33_IRB/ar09.html

http://www.aicpa.org/pubs/jofa/aug2006/ftta.htm

http://www.thefreelibrary.com/Avoiding+substantial+penalties+by+properly+reporting+damage+awards...-a0149071423

 

 

 

 

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3078
Experience: EA, CEBS - 34 years experience providing financial advice
Bill and 7 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
Reply to Bill's Post: Thanks for the reply and a couple of the links you sent were something I had not found yet so they were beneficial. My concern is with the last part of my question of reporting the entire settlement. I know the company only reported the 19,400 that I received but in looking at different IRS sections on lawsuit awards and settlements it looks as though I have to declare the full amount of the award and then deduct the attorney fees but I have no idea why my 1099 is not reflecting that full amount? (Granted I would prefer to use the 19,400 as income and not the whole 40k) Anyway, thank you for the info and the agreement on that the money should be on line 3 of the 1099.
Expert:  Bill replied 6 years ago.

Based on the forms (1099 & W-2) that you have received, you will be reporting everything but the attorney's fees (I assume there is nothing in box 14). If you report the entire $40,000 instead and then take the adjustment on line 36 for the attorney's fees (assuming the fees were for unlawful discrimination), your AGI will be the same in both circumstances. However, the amounts on your return will not match up with the information that the IRS receives on the 1099 and W-2 which could result in questions from the IRS. Perhaps the company will change some of the information in the other boxes when you inquire about box 3.

Below are the 1099-MISC instructions which I am sure you have already looked at:

http://www.irs.gov/pub/irs-pdf/i1099msc_07.pdf

 

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3078
Experience: EA, CEBS - 34 years experience providing financial advice
Bill and 7 other Tax Specialists are ready to help you

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