@dmoncrea wrote:
If I settled a discrimination lawsuit and I was issued a check for taxable emotional distress, can I deduct the medical expenses I paid out of pocket - even if they weren't greater than 7.5% of my adjusted gross income? (I'm itemizing). For example, if my settlement was $200,000 and I added this as a 1099-M taxable income and I had 5k in medical expenses, but no other medical expenses to claim, is there a way that I can deduct the 5K? If so, how would this be done in TurboTax Premier?
My colleagues both missed the special rules for settlements of this type. See here,
https://www.irs.gov/pub/irs-pdf/p4345.pdf
If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income. However, the amount you must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit. Attach to your return a statement showing the entire settlement amount less related medical costs not previously deducted and medical costs deducted for which there was no tax benefit. The net taxable amount should be reported as “Other Income” on line 21 of Form 1040, Schedule 1.
So you can deduct the cost of medical attention that was due to the emotional distress "right off the top" of the taxable settlement, as long as you did not previously take a schedule A itemized deduction for the same expense. To do this in Turbotax and be able to e-file, you would enter the settlement income, then create an item of "other income" with a negative number in the amount of the medical expense to offset the income. I would give it a description like "Medical expense per pub. 4345".
Or, you can file by mail. don't enter the 1099-MISC into your return. Enter the net amount after subtracting medical expenses as "other non-wage income" and attach a copy of the 1099-MISC and a written explanation to your return when you mail it.
