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Report taxable settlement amounts on Line 6 of Form 1040 after completing Schedule 1 (1040).
Independent contractors report their income on Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business (Sole Proprietorship). Also file Schedule SE (Form 1040 or 1040-SR), Self-Employment Tax if net earnings from self-employment are $400 or more. You may need to make estimated tax payments.
IRS Tax Rules on Injury Settlements. The federal government will have access to your settlement information. In many cases, the insurance company will submit a 1099 form to the IRS to report the amount of compensation paid to settle your claim.
Think legal settlements for auto accidents and slip and fall injuries. Because such payments for compensatory damages are generally tax-free to the injured person, no Form 1099 is required.
Taxes on Lawsuit Settlements. The tax liability for recipients of lawsuit settlements depends on the type of settlement. In general, damages from a physical injury are not considered taxable income. However, if you've already deducted, say, your medical expenses from your injury, your damages will be taxable.
If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.
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