settlement refund for a defective product and received a 1099-misc

Since the payment to you was reported on Form 1099-MISC and the IRS has a copy of that form, they will expect to see it reported on your tax return.  

To you, this is a refund instead of income.  You should keep any documentation that you may have regarding this to provide to the IRS if asked. 

Reporting this in TurboTax will be a two-step process, first to include the 1099-MISC as income and then to make a negative adjustment to remove it. 

To include the 1099-MISC as a part of your tax return, follow these steps:

• On the top row of the TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner)
• This opens a box where you can type in “1099-MISC” (be sure to enter exactly as shown here) and click the magnifying glass (or for CD/downloaded TurboTax, click Find)
• The search results will give you an option to “Jump to 1099-MISC"
• Click on the blue “Jump to 1099-MISC” link
• Answer Yes you did receive a 1099-MISC
• Fill in the details from your 1099-MISC then click Continue
• Provide a short description for the reason you received the 1099-MISC then click Continue
• On the next screen titled, “Does one of these uncommon situation apply?” choose the last option, None of these apply and then click Continue
• On the next screen asking if the 1099 involved work like your main job, answer No and click Continue
• On the next screen, check the box that you received the income in 2019 and then click Continue
• Finally, choose “No, it didn’t involve an intent to earn money” and click Continue
• Answer the questions on the next couple of screens to finish the process

Now the income shown on the Form 1099-MISC has been added to your return.  Next, it will be “removed” from the return.

Follow these steps:

• Go to Federal Taxes > Wages & Income and scroll to the bottom of the screen to the Less Common Income section (expand the section by clicking Show More if necessary)
• Click Start or Update beside Miscellaneous Income, 1099-A, 1099-C
• Scroll to the bottom of the list and click Start or Update beside Other Reportable income
• Answer Yes to move forward
• Enter a brief description, such as “settlement refund adjustment,” and the amount reported on the 1099-MISC as a negative number then click Continue
• Click Done

When you see your Form 1040 Schedule 1, the amount shown on the Form 1099-MISC will be reported twice on line 8 – once as a positive amount and once as a negative amount.