reporting EEOC awards (non-taxable) and legal fee refunds

Silverada

I think I get a 1099 for the EEOC judgement but it is not taxable. How to fill my tax return? My legal fees were refunded. These were previously taxed. Do I include on the tax return somewhere or ignore?

Taxlady06

There are a lot of rules and exceptions for whether lawsuit settlements are taxable or nontaxable. The general rule is that damages for a physical injury or physical sickness are not taxable and are not reported on your tax return.

Punitive damages are usually considered taxable income.

Damages for emotional distress are generally treated as taxable income unless the emotional distress is related to a physical injury or illness. Reimbursed medical expenses are usually nontaxable and can be excluded from your tax return.

Other lawsuit damages such as lost wages, discrimination, or defamation are usually taxable income that need to be reported on your tax return.

The IRS specifically states, "If you receive a settlement in an employment-related lawsuit; for example, for unlawful discrimination or involuntary termination, the portion of the proceeds that is for lost wages (i.e., severance pay, back pay, front pay) is taxable wages and subject to the social security wage base and social security and Medicare tax rates in effect in the year paid. These proceeds are subject to employment tax withholding by the payer and should be reported by you as wages on Line 1a of Form 1040, U.S. Individual Income Tax Return."

Some settlements can be from various elements of the case. For example, the total could include amounts for back pay, emotional distress and/or attorney fees. You should have received a statement that lists the elements of your payment. Using this statement, you can determine if any of the settlement is taxable.

If an amount is allocated to lost salary this is usually paid as a payroll check with the applicable withholdings. The employer reports this check to the IRS via a W-2 form. You would then report the W-2 income as reported on your W-2 form.

Any portion of the proceeds that are not subject to payroll taxes would be reported on a Form 1099-MISC. If you have a taxable amount, you will need to report this as taxable income on your return. In our software you will select the Income tab and then 1099-MISC from the drop-down menu. Here you can enter the 1099-MISC as needed.

If you previously paid for attorney fees from your taxable income, and the amount has been refunded to you as part of the settlement, this does not need to be included on your return. You are simply being reimbursed for the amounts you previously paid.

There is an option to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination. However, if you were reimbursed the fees paid, this would not be applicable to your situation.

MatthewD

Hi Silverada,

The IRS has an FAQ that has an Analysis section relating to what may be non-taxable. The IRS says, "Awards and settlements can be divided into two distinct groups to determine whether the payments are taxable or non-taxable. The first group includes claims relating to physical injuries, and the second group is for claims relating to non-physical injuries."

https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments

Settlements that involved physical injuries are non-taxable or are not subject to federal employment taxes, such as FICA taxes. Other non-taxable settlement result from an unlawful discrimination case.

A non-pecuniary case means that no monetary amount can be determined. For example, pain and suffering, job satisfaction etc. A non-pecuniary settlement does not mean the settlement is non-taxable. It could be taxable or it may not.

I suggest that you speak with your attorney and go over the detail of the settlement to determine what is taxable or not. Just because it was related to civil rights, not not make it non-taxable either. In my opinion, from what you have explained, it is likely all taxable as it did not relate to "unlawful discrimination" or "physical injury", however, it would be best if you consulted with your attorney. That is my recommendation.

Silverada

Thank you all.

Silverada

Thank you for your explanations. I am retired on socsec so no employment in 2024. Any chance you would know how the judgement award might be handled?

The EEOC court judgement included a monetary award to me of "non-pecuniary compensatory
damages for the emotional harm because of employer" for verbal abuse, false accusations, undermining of authority, suspension, and intentional damage to the Complainant’s professional reputation. Additionally, the Complainant was subjected to a “demonstration opportunity” in retaliation for prior EEO activity. " This will have the 1099. However, would it be excluded from income because it is related to Civil Rights, i.e., would the America Jobs Creation Act (Civil Rights tax relief act) of 2004 apply? Would I need to submit the 1099-MISC on the tax form and note it is excluded as income?