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1099 on legal settlement?
Anonymous8 views5 answers
Depending on the case and claims settled, you may be able to deduct the attorney fees. That said, the situations you can deduct attorney fees are limited, and are not the norm. You need to consult a tax attorney in order to get specific advice based on the facts of your case, and because you will be going into specific facts and details and law as applied thereto you can expect to pay for an hour or two of an attorney's time.
Depending on the case and claims settled, you may be able to deduct the attorney fees. That said, the situations you can deduct attorney fees are limited, and are not the norm. You need to consult a tax attorney in order to get specific advice based on the facts of your case, and because you will be going into specific facts and details and law as applied thereto you can expect to pay for an hour or two of an attorney's time.
You cannot change the 1099, but if the settlement is for personal physical injury, it is not taxable. Also, legal fees are deductible for most employment cases. But outside of employment and personal physical injury, your legal fee may not be deductible. It's important to get the right advice here before you receive the settlement.
The settlement may be taxable or may not be taxable but a 1099 being issued for the gross amount of the settlement is appropriate. Attorney fees incurred for non business purposes are not deductible.
Forms W2 and 1099-MISC
If you receive a settlement, the IRS requires the paying party to send you a Form 1099-MISC. Box 3 of Form 1099-MISC will show “other income” – in this case, money received from a legal settlement. Generally, all taxable damages are required to be reported in Box 3. However, if a taxpayer receives an award of back pay, that would constitute wages. This amount would be reported on Form W-2 as usual. The amount of damages listed on a 1099-MISC is never reduced by attorney's fees.
As stated above, it depends on what the settlement is for. As everyone's tax situation is different based on multiple factors you would benefit from consulting with a Licensed CPA or EA if your current attorney is not able to provide a detailed answer for you. There are a couple of situations where a settlement is not taxable; however if a 1099 is being issued then you should prepare yourself to pay taxes on the settlement.
What kind of settlement? Personal injury? Employment? Other Civil matter? You need to get a professional tax opinion- consult - pay the lawyer for an hour to get a researched/code specific answer.
