Discussion:1099-MISC for out of court settlement award
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Discussion Forum Index --> Tax Questions --> 1099-MISC for out of court settlement award
DR BRISKET (talk|edits) said: | 5 June 2006 |
| Client (who I filed an extension for 2005 personal taxes) received over $65,000 in an out of court settlement for a case involving the wrong application a chemical lawn treatment. In addition to killing her lawn, vegetation and trees, her health was affected. Client incurred substantial medical bills in addition to the cost to restore her landscaping. Attorney fees were deducted from the total proceeds the client received. The 1099 MISC thus represents only the net settlement proceeds she received. I was totally shocked to even see a 1099 as I did not think such proceeds were usually 1099 reportable. I could certainly use some expertise advise on how to proceed from here. Thanks. | |
| 5 June 2006 | |
| If the original cause of action referred to personal physical injury, then you have a case for claiming a Sec. 104(a)(2) exclusion. Amounts received for damages to property will generally be used to reduce the taxpayer's basis in the property. | |
| 5 June 2006 | |
| Riley2, would you agree with the following scenarios and related results?
Scenario 1: The award is 100% related to property damage. Result: The gross award (i.e., the net 1099-MISC amount + attorney fees not included on 1099-MISC) would be a reduction to basis. Scenario 2: The award is 100% related to personal physical injury. Result: 100% of the gross award would be excludible from taxable income under §104(a)(2). Scenario 3: The award is X% related to personal physical injury and (100%-X%) related to property damage. Result: (A) X% of the gross award would be excludible from taxable income under §104(a)(2); and (B) (100%-X%) of the gross award would be a reduction to basis. Note: Any amounts related to punitive damages would be includible in taxpayer's income. | |
DR BRISKET (talk|edits) said: | 5 June 2006 |
| Riley2 & PGattoCPA: Thanks for you input. Since the settlement was out of court, there are no punitive damages. The settlement proceeds only represented recoveries for both medical expenses and property damages. Based on both of your replies above, it appears I only need to attach an explanation statement to my client's tax return along with a copy of the 1099 explaining what the Form 1099 is for, and claiming exemption from taxable income per IRC §104(a)(2)for the medical reimbursements, and a reduction of my client's property basis for the property damage portion of the settlement. Now, in reality, I wouldn't think there would be any decrease to her basis. Wouldn't the amounts she had to spend to replace the damaged landscaping, trees and vegetation be added to her basis? If this is the case, her expenses and the settlement proceeds merely set each other off, basically causing no overall substantial increase or decrease to her basis. Am I correct with this analysis? | |
| 5 June 2006 | |
| Dr. Briskett, the damages may exceed the taxpayer’s basis in the property, especially if the landscaping was done many years ago.
Generally, if the recovery exceeds his original cost basis, then the excess is treated as a realized capital gain. However, you may be able to elect to treat this as an involuntary conversion under Sec. 1033(a)(2)(A), which should reduce the recognized capital gain if the property is replaced within the statutory replacement period. | |
