Class action proceeds

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excellentshyguy
excellentshyguy Member Posts: 4 Newcomer

When class action proceeds are received but no Form 1099 is issued, does one include the amount received as income? Is there a minimum amount necessary before reporting is required?

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  • Henry
    Henry FreeTaxUSA Agent Posts: 86
    edited November 2023 Answer ✓
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    According to IRS Publication 525:

    "In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax."

    (see the Introduction on pg 2, https://www.irs.gov/pub/irs-pdf/p525.pdf)

    Some taxable income doesn't get reported on a tax form to the recipient or to the IRS, and in that case the IRS may simply rely on the integrity of the taxpayer to report it. The IRS says that income is income, whether you receive a Form 1099 or not.

    For example, when it comes to Form 1099-INT, the IRS instructs that Form 1099-INT should be filed for each person to whom at least $10 of interest was paid. So someone may not receive a Form 1099-INT if they only had $9 of interest income, but that doesn't mean that the $9 doesn't need to be reported on their tax return. The IRS clarifies that "you must report all taxable and tax-exempt interest on your federal income tax return, even if you don't receive a Form 1099-INT."

    (see https://www.irs.gov/taxtopics/tc403 )

    The same concept would apply to income from a class action lawsuit. If the compensation you received is considered taxable income, then it generally needs to be reported on your tax return whether or not it exceeds a certain threshold or whether or not it was reported to you on a 1099-MISC.

  • billatfreetax
    billatfreetax Member Posts: 1 Newcomer
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    It seems perfectly clear that the IRS rule says that class action settlements for non-physical injuries are taxable, but that seems to fly in the face of how rebates are treated - namely that a rebate is considered a DISCOUNT on the original price of the product and is non-taxable. Like a coupon. Or a sale. Many of the class-action settlements I get are the result of a company breaking a law like price-fixing which resulted in inflating the price of the product and the settlement simply returns that excess to the buyer. For example, if I paid $100 for an item and the suit says the illegal action by the seller made the price $10 higher than it should have been and I get that $10 back, I can't see how that reasonably constitutes income. Sure, if the suit included punitive damages and I actually got $200, I could see some portion of that as taxable. No, I have never received any tax form for such settlements, most times they are for peanuts anyway.

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  • zabostaxes
    zabostaxes Member Posts: 7 Level 2
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    Hi excellentshyguy,

    There is no minimum amount necessary before reporting. You report it as income based on what the settlement was supposed to replace. If the settlement is paying for a physical injury then it's not taxable. However, if there is a payout for emotional/punitive damages then you report all of it.

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

  • excellentshyguy
    excellentshyguy Member Posts: 4 Newcomer
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    If the issuer does not provide a 1099 Form to the payees, how does the IRS know how the proceeds are accountable? Interest on bank savings accounts, for instance, are not required to be reported by the payee unless an INT-1099 is submitted and the amount of interest exceeds $10.

    Proceeds MAY BE subject to income tax; this is a gray area. Most references indicate that an insurer SHOULD provide a 1099-MISC.

  • MatthewD
    MatthewD FreeTaxUSA Team Posts: 247
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    Hi excellentshyguy,

    Generally, a 1099-MISC must be issued if the amount is $600 or more. If you were issued something less, then it is possible no 1099 is coming and the IRS has no information on the payment. However, you must still report the proceeds. Generally, you should get something in the mail about the tax implications of the payment.