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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 34316
Experience:  Taxes, Immigration, Labor Relations
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I am settling a case for punitive damages and emotional

Customer Question

I am settling a case for punitive damages and emotional distress. They are saying they will be 1099 it. will this affect my taxes?
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: So I am trying to see if that would be taxed at the end of the year
JA: Is there anything else important you think the Accountant should know?
Customer: settlement amount
Submitted: 8 months ago.
Category: Tax
Expert:  Lev replied 8 months ago.

Yes - these will be reported as taxable income.

Normally - that amount is reported to you on form 1099misc - box 3

and on your tax return - form 1040 - it will be transferred to line 21.

That amount is added to other taxable income.

If that payment will be in 2018 - it will be reported on your 2018 tax return.

Let me know if you need any help.

Customer: replied 8 months ago.
How do I get it to not be taxed based on being a settlement for emottional distress?
Customer: replied 8 months ago.
A portion is being w2 and the other 1099 so it would not be taxed. Is there anyway for a portion to not be taxed.
Expert:  Lev replied 8 months ago.

The statute ONLY allows to exclude from taxable income a settlement for personal physical injuries or physical sickness.

The proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness.

That amount is NOT reported on form 1099misc - it is specifically excluded.

But all other settlements are taxable.

If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income.

That is why it will be reported to you.

You will not be able to exclude that payment.

Customer: replied 8 months ago.
It is better to have the settlement all w2 or a small portiion w2 and the the large amount 1099
Customer: replied 8 months ago.
Example 10k w2 and 40k 1099.
does it matter
Expert:  Lev replied 8 months ago.

For income tax purposes - there is no difference - as all income is added together.

Wages reported on W2 are subject to additional employment tax withholding 7.65% will be withheld from your pay - so that is a matter - you may want less wages.

On the other hand - wages will increase your future social security benefits, and may have some other positive effect because that is earned income.

.

You might find helpful following publication regarding

Settlements — Taxability

https://www.irs.gov/pub/irs-pdf/p4345.pdf

Expert:  Lev replied 8 months ago.

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If you still have any doubts, need clarification - please be sure to ask.

I am here to help you with all Social Security / Tax related issues.