Lawsuit winnings and taxes

Forum|Forum|1 year ago
September 11, 2024
2 replies
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Hello I won a small sum in a lawsuit last year. I recieved a W2 that that showed the lump sum. I confirmed with my lawyers office that I only need to pay taxes on the amount I won. Could anyone suggest how to file to reflect this?

Thanks in advance

Best answer by rjs

@BrandonSF

It looks like you failed to make clear a key aspect of your situation. When you first said the background check was for a rideshare company, I was thinking of you as a customer or passenger. But when you said they blocked you from work, it made me realize that you are the driver. The money that you received is compensation for lost income from driving for the rideshare company. That means that the money IS self-employment income and IS subject to self-employment tax. So you SHOULD report it on Schedule C. It also means that you should deduct the amount you paid to the lawyer as a business expense on Schedule C, in the expenses category for "Legal and Professional Fees." That's how you avoid paying tax on that amount, and it has nothing to do with unlawful discrimination. You report the full amount from the 1099 as business income, and the amount that was paid to the lawyer as a business expense. And you don't need forms mode or any other tricks to do this in TurboTax.

rjs

Employee

Since the award was reported on a W-2, I assume it was for back wages. What is the distinction between "the lump sum" and "the amount I won"? Do you mean that part of the amount you were awarded went to pay your lawyer? If so, the amount you actually won is the full amount of the award, not just what was left after you paid your lawyer. The full amount is taxable income. The fact that you used part of your award to pay your lawyer does not make it non-taxable. (Employment lawyers, and the people in the lawyer's office, are not necessarily tax experts.) You just enter the W-2 as it is in your tax return.

However, what was the lawsuit for? If it was for unlawful discrimination, you can claim an adjustment (or "above-the-line deduction") on your tax return for the lawyer's fee, which means you would not pay tax on the amount of the fee. Officially TurboTax does not support the adjustment for lawyer's fees for an unlawful discrimination claim. It's listed in the Unsupported Calculations document. Nevertheless, it can be entered in TurboTax for 2023, but only in forms mode. Forms mode is available only in the CD/Download TurboTax software, not in TurboTax Online, so there is no way to make the entry in TurboTax Online.

Here's how to enter the deduction for attorney fees for an unlawful discrimination claim in TurboTax for 2023. In forms mode open the "Form 1040 or Form 1040-SR Worksheet" (1040/1040SR Wks). Scroll down to the Schedule 1 section (Additional Income and Adjustments to Income), then to Part II Adjustments to Income, and then to the Other Adjustments to Income Smart Worksheet between lines 23 and 24. Enter the attorney fees on line K of the Smart Worksheet. The amount will then appear on Schedule 1 line 24h, and it will be deducted from the income on your Form 1040.

Refer to IRS Publication 525 for important additional information about this adjustment.

BrandonSFAuthor

Thank you so much for the detailed reply. I had a consumer lawsuit against a rideshare company's background check company which mid-idtentifed me. I have confirmed with the lawyers office that I only need to pay the amount I was awarded after fee's. The 1099 shows the full amount. That was given by the company being sued and it makes sense that they would put the full amount. My question is how to file properly to reflect that I only owe the amount I actually recieved, and I think you answered that in the last paragraph. It was also a 1099, not a W2.

rjs

Employee

@BrandonSF wrote:

It was also a 1099, not a W2.

In your original question you wrote "I received a W2." That was misleading. Details matter.

There is no plain Form 1099. There are about 20 different kinds of 1099 forms. All 1099 forms have one or more letters after the 1099. What kind of 1099 do you have? Is it 1099-MISC, 1099-NEC, or something else? If it's a 1099-MISC, which box is the income in?

Misidentification in a background check doesn't sound like unlawful discrimination to me. IRS Publication 525, which I referenced above, says that the deduction only applies to claims "under various provisions of federal, state, and local law listed in [IRC] section 62(e)" (and a couple of other situations that clearly do not apply to you). I suggest that you ask your lawyer what the basis is for saying that the fee is not taxable. Ask the lawyer, not someone in the office who is not a lawyer. You might get some other opinions from other people here. You might also want to consult a local tax professional.

Based on your revised description, I now assume that the award was not for lost wages. If the form that you got is a 1099-NEC, and the lawsuit does qualify for the unlawful discrimination deduction, there are some additional complications in reporting it on your tax return.

Opus 17

Employee

[Edited: This is business damages, not personal damages. Legal expenses are a deductible business expense.]

The lawyer is wrong. You report the gross settlement as income. Prior to 2018, the legal expenses were an itemized deduction subject to the 2% rule, but that deduction was eliminated. The only exception is for recoveries for unlawful discrimination (age, sex, race, etc.).

The definition of unlawful discrimination is very broad, and depends on both federal and state law. If you think your claim might involve unlawful discrimination, check with your attorney. https://www.americanbar.org/groups/business_law/resources/business-law-today/2022-april/tax-write-off-of-legal-fees-simplified/

If this is a UDC case, you report the entire gross amount as income, and then you need to make a manual entry in Turbotax to take the deduction. To make a manual entry, you must be using the program installed on your own computer from a CD or download, the manual entry can't be made in Turbotax online.

If this is not a UDC case, then the entire gross amount is taxable, sorry. Report it as "other" or miscellaneous income. Although this would have been self-employment income on schedule C, and subject to self-employment tax if you earned it in the course of working, I don't believe the settlement is or should be subject to SE tax, so I would not report it on schedule C, just as other miscellaneous income.

BrandonSFAuthor

Thank you for the reply again. I can confirm a tax expert has also confirmed that I'm only responsible to pay taxes on the amount I received. I would use them to file but they have a very high fee. Ideally I'd like to file myself. There's also a consumer tax act that has been filed somewhat recently that confirms my case would only be taxed on the lump sum that I received and not the full amount.