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Message
Question about settlement and taxes
Posted on 3/17/19 at 6:56 pm
Posted on 3/17/19 at 6:56 pm
We were in a bad car accident back in 2015 with a drunk driver who ran us off the road into a tree. The wife and I had relatively minor injuries, but did both have to go to rehab for 3 months, and my wife continues to see a counselor for similar to PTSD.
We settled with the insurance company last year, and my attorney sent me 1099-MISC forms for tax purposes. The agreement in the settlement was that the funds were for emotional distress, and we were told it was not taxable.
I am using H&R Block software for my taxes, have for several years and Turbo Tax before that. Taxes were always easy to do.
But when I input these 1099-MISC's into it now, it's counting it as income and jacking up my taxes owed.
I emailed the attorney to confirm and he told me it should not be taxable, but that I needed to consult a tax professional.
Anyone ever dealt with similar? I would think I would find the ability in the software to account for this, but I'm not seeing it in the 1099-MISC area. Maybe I will have to consult a tax professional, but I would like to avoid it if possible.
We settled with the insurance company last year, and my attorney sent me 1099-MISC forms for tax purposes. The agreement in the settlement was that the funds were for emotional distress, and we were told it was not taxable.
I am using H&R Block software for my taxes, have for several years and Turbo Tax before that. Taxes were always easy to do.
But when I input these 1099-MISC's into it now, it's counting it as income and jacking up my taxes owed.
I emailed the attorney to confirm and he told me it should not be taxable, but that I needed to consult a tax professional.
Anyone ever dealt with similar? I would think I would find the ability in the software to account for this, but I'm not seeing it in the 1099-MISC area. Maybe I will have to consult a tax professional, but I would like to avoid it if possible.
4
Posted on 3/17/19 at 7:15 pm to kywildcatfanone
Your attorney 1099'd you? Or it came from the insurance company?
Posted on 3/17/19 at 7:16 pm to iknowmorethanyou
quote:
Your attorney 1099'd you? Or it came from the insurance company?
We got two from the attorney, one for me and one for my wife.
Posted on 3/17/19 at 7:24 pm to kywildcatfanone
Found this on an IRS document about settlement liability.
"If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income."
Do I just not record it at all? Is it that simple?
"If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income."
Do I just not record it at all? Is it that simple?
Posted on 3/17/19 at 7:50 pm to kywildcatfanone
quote:
wife continues to see a counselor for similar to PTSD.
You’ve got to be kidding me
Posted on 3/17/19 at 8:25 pm to indytiger
Why would you say that?
We got hit by a drunk driver crossing over a hill, at night, headlights coming straight at us. I veered to the right, and he sideswiped me, threw me across the road, and I hit a tree head on at 50mph just off the road on the other side. Airbags deployed, and there was a dust in the air, I thought the truck was on fire. Couldn't get my door opened because of the impact, so I'm trying to unbuckle myself, calm my wife down so I can tell her that I think we have to get out, and I'm trying to unbuckle her, fumble over top of her to unlock her door and push her out. It was pretty terrifying, and not much bothers me.
If you haven't been in that situation, you shouldn't judge.
We got hit by a drunk driver crossing over a hill, at night, headlights coming straight at us. I veered to the right, and he sideswiped me, threw me across the road, and I hit a tree head on at 50mph just off the road on the other side. Airbags deployed, and there was a dust in the air, I thought the truck was on fire. Couldn't get my door opened because of the impact, so I'm trying to unbuckle myself, calm my wife down so I can tell her that I think we have to get out, and I'm trying to unbuckle her, fumble over top of her to unlock her door and push her out. It was pretty terrifying, and not much bothers me.
If you haven't been in that situation, you shouldn't judge.
Posted on 3/18/19 at 6:23 am to kywildcatfanone
a settlement for that accident is not taxable. i am puzzled why your attorney sent you a 1099? i would seriously question that.
Posted on 3/18/19 at 7:19 am to bayou choupique
I think I'm going to have to call a tax person. My taxes are usually very simple to do.
Posted on 3/18/19 at 11:44 am to kywildcatfanone
quote:
The agreement in the settlement was that the funds were for emotional distress, and we were told it was not taxable.
You were told incorrectly.
The only settlement proceeds that are excluded from personal income taxes are those for physical injuries and/or physical illness/sickness.
Emotional distress / emotional injuries are specifically and clearly NOT excluded under the US tax code.
Some states (LA is not one of them) go further and exclude a wider range of settlements from state taxation, but that doesn't affect federal taxes.
Now, because that settlement is taxable, you potentially can deduct the costs of her emotional support care, provided she is meeting with a licensed medical professional. However, medical expenses have a high threshold to meet. They should be deducted in the year paid, regardless of when the settlement occurred.
I'm very sorry you got bad advice, and I'm also very sorry for the accident and what you and your wife have gone through. I'm dealing with a new client right now that had an attorney tell her that her settlement proceeds weren't taxable, and they are, and it's causing a big issue for her. Attorneys, unless they are tax attorneys, don't know jack about the tax code.
Posted on 3/18/19 at 11:47 am to bayou choupique
quote:
i am puzzled why your attorney sent you a 1099?
Because a 1099 includes information stating a payment was made. The determination of whether said payment is taxable or not is not made by the attorney, but rather, by the taxpayer.
Posted on 3/18/19 at 12:29 pm to LSUFanHouston
quote:
Emotional distress / emotional injuries are specifically and clearly NOT excluded under the US tax code.
So, are you saying that general damages for pain and suffering, etc., in the case of an insurance settlement via a wreck of this type IS taxable? I was told the same as the OP, in that, these are NOT taxable.
Posted on 3/18/19 at 12:48 pm to kywildcatfanone
Found this...it may help:
Personal physical injuries or physical sickness
• If you receive a settlement for personal physical injuries or physical sickness and did not take an
itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount
is non-taxable. Do not include the settlement proceeds in your income.
BUT
• If you receive a settlement for personal physical injuries or physical sickness, you must include in
income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to
the extent the deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you
paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical
expenses to each of the years you paid medical expenses. See Recoveries in Publication 525 for
details on how to calculate the amount to report. The tax benefit amount should be reported as “Other
Income” on line 21 of Form 1040.
Emotional distress or mental anguish
• 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 above.
BUT
• 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. However, the amount you
must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress
or mental anguish not previously deducted and (2) previously deducted medical expenses for such
distress and anguish that did not provide a tax benefit. Attach to your return a statement showing
the entire settlement amount less related medical costs not previously deducted and medical costs
deducted for which there was no tax benefit. The net taxable amount should be reported as “Other
Income” on line 21 of Form 1040.
Personal physical injuries or physical sickness
• If you receive a settlement for personal physical injuries or physical sickness and did not take an
itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount
is non-taxable. Do not include the settlement proceeds in your income.
BUT
• If you receive a settlement for personal physical injuries or physical sickness, you must include in
income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to
the extent the deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you
paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical
expenses to each of the years you paid medical expenses. See Recoveries in Publication 525 for
details on how to calculate the amount to report. The tax benefit amount should be reported as “Other
Income” on line 21 of Form 1040.
Emotional distress or mental anguish
• 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 above.
BUT
• 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. However, the amount you
must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress
or mental anguish not previously deducted and (2) previously deducted medical expenses for such
distress and anguish that did not provide a tax benefit. Attach to your return a statement showing
the entire settlement amount less related medical costs not previously deducted and medical costs
deducted for which there was no tax benefit. The net taxable amount should be reported as “Other
Income” on line 21 of Form 1040.
Posted on 3/18/19 at 12:51 pm to btnetigers
Damages for Emotional Distress
Tax treatment of awards compensating for emotional distress depends on the case. Emotional distress itself isn't a physical injury or physical sickness. However, damages you receive for emotional distress caused by physical injury or sickness are tax free. For example, damages for emotional distress arising from physical injuries received in a car accident are tax free.
On the other hand, damages for emotional distress that didn’t arise from physical injury or sickness are taxable income. For example, damages for emotional distress arising from an employment discrimination claim are taxable. But there is a limited exception when emotional distress leads you to seek medical treatment for physical symptoms, such as headaches, insomnia, and stomach disorders. In this event, emotional distress damages up to the amount of your actual medical care expenses are tax free.
This is a pretty simple way of putting it.
Tax treatment of awards compensating for emotional distress depends on the case. Emotional distress itself isn't a physical injury or physical sickness. However, damages you receive for emotional distress caused by physical injury or sickness are tax free. For example, damages for emotional distress arising from physical injuries received in a car accident are tax free.
On the other hand, damages for emotional distress that didn’t arise from physical injury or sickness are taxable income. For example, damages for emotional distress arising from an employment discrimination claim are taxable. But there is a limited exception when emotional distress leads you to seek medical treatment for physical symptoms, such as headaches, insomnia, and stomach disorders. In this event, emotional distress damages up to the amount of your actual medical care expenses are tax free.
This is a pretty simple way of putting it.
Posted on 3/18/19 at 1:58 pm to btnetigers
quote:
So, are you saying that general damages for pain and suffering, etc., in the case of an insurance settlement via a wreck of this type IS taxable? I was told the same as the OP, in that, these are NOT taxable.
So here's the thing where people get caught up.
If the physical injuries causes the mental anguish, then the damages paid for mental anguish are NOT taxable.
If the mental anguish is separate and apart from the physical injuries, the related damage payments ARE taxable.
It's going to depend upon the OP's settlement agreement.
Generally speaking, the IRS considers all income taxable, and you have to show why it is not.
I should have been clearer in my original post.
Posted on 3/18/19 at 6:37 pm to LSUFanHouston
quote:
If the physical injuries causes the mental anguish, then the damages paid for mental anguish are NOT taxable.
Thanks for all the posts. I wasn't completely clear, and that is my fault. The above is our situation.
When the agreement was signed, it was worded that this payment was for physical injuries and mental anguish associated with the accident.
I talked to a CPA today and was told that the attorney sent me a 1099 for the settlement amounts in error, and I contacted the attorney and he is discussing this with his accountant.
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