How to report settlment money

[confused_person]

removed

[robartsd]

Presumably the settlement is to compensate you for damages, so it is not income. Not sure how the IRS looks at it though.

[terran]

This looks like a good place to start: https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments. The last paragraph under the "Analysis" heading seems to say that you and the attorney should have received separate 1099s with the amounts paid to each if the attorney fees were part of the settlement.

Here's something else I found: https://www.irs.gov/pub/irs-pdf/p4345.pdf. This sounds like you were probably awarded punitive damages if you suffered no actual damages? They say that should be reported as "Other income."

I'm not finding a definite answer on how to deal with legal fees in relation to a settlement, but hopefully that starts you on the right track.

[cool7hand]

When I worked in the legal field, the default rule was the damages with no relation to a physical or emotional distress loss were taxable. I FIREd a couple of years ago, but I'm not aware of any change. I scanned the linked shared above (https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments), and I believe your damages would be taxable.

This isn't legal advice, and you should check with a tax professional in your state. State law can differ from federal law.

[startbyservingothers]

I had an FDCPA settlement some years ago.  I am not allowed to discuss details, but often times when an attorney takes a case like this on contingency, the attorney fees can be multiples of what the consumer receives.  - A set amount is guaranteed to the consumer (if it goes to court and wins.) and attorney fees are paid to the attorney by statute.

Basically the IRS considers your attorney's fees a "Benefit received" and part of your income.  (At that time) You could deduct them, but the new tax law basically axed most of those as deductions, even if you manage to itemize.
In my case, I was audited because I ended up forgetting to report it all-together since I was trying to figure out how to handle the 1099 for the entire amount.  I prepaid their estimated bill provided by the IRS and told them I was only willing to pay taxes on what I actually received.   -  I do not believe this is what congress intended when they passed FDCPA, FCRA, and TCPA laws.  I.e.  Someone who gets $1000 settlement and their attorney gets $5000 might end up owing more that $1000 in taxes.   The IRS agreed to my request, and I ended up paying tax on my portion of the settlement.  I am doubtful this could be replicated confidently.  I was in a low tax bracket and so the total amount the IRS was asking for was relatively small.  I believe they just wanted to close the case considering that I never spoke to a single person and all correspondence was done by mail.
 
My case was years before I filed taxes professionally, but I had been filing my own for years at that point.
If this was a business account, or any account you used for business, you can count these as business income and expenses.  -  At one point I considered 'going into business"  suing for robocalls,  but decided to go in other directions.  In that case I would file a schedule C.  (The 'profit' would receive 15.2% SE tax + be taxed at your marginal rate , but at least I could deduct the attorney's fees first.)   If you don't have a valid business link, you're likely going to have to count the entire amount as income.  You won't have to pay SE tax on it though.   Because of SE tax on business income you're only going to pay a little bit more with that route anyways.