Originally Posted by playitnow
The insurance company says that it is nontaxable but because of IRC section 6041, they have to report it on a 1099-MISC, box 3 Other Income. I believe that there should be no change and they should report it on the W-2. They refuse to change it. My question is - how should I show this, so the IRS sees the 1099 but it is still nontaxable? Appreciate any help in this matter.
basically, a lawsuit settlement may involve monetary agreements between parties involved in litigation. So, the specific handling of a lawsuit can vary from case to case; the items required to be reported in box 3 include all punitive damages for nonphysical injuries and sicknesses that exceed the amounts paid out for medical care should be reported here.
Box 3 of Form 1099-MISC is used to report other income that is not reportable in one of the other boxes on the form.
However, if you receive an award of back pay that constitutes wages, it generally would be reportable on Form W-2, not Form 1099-MISC. If the settlement had actually been paid to you for physical injuries or physical illness, then that part of the settlement would not be taxable. Even though your claim may have involved a physical injury, if the settlement was not paid directly to reimburse you because of those physical injuries, then this is taxable income to you, and explains why you received the 1099 form. If the settlement had related directly to compensation for physical injuries, then a 1099 would not have been issued for that portion of the settlement.
The amounts you were paid should have been reported in box 3 of the 1099 form and you will report that amount on line 21 of 1040 as other income. If the amount reported to you on the 1099 form included the amount that was sent to your attorney, you may claim a deduction for the attorney fees on Sch A of 1040 as a miscellaneous deduction.
Note; you can, from your gross income, exclude only non-punitive awards /damages received pursuant to a settlement in a personal injury case aslongas the personal injury or sickness is physical; and received the payments on account of such injury or sickness.