29 Mar How to treat a settlement on your tax return

Q. In 2018 I received a distribution in the settlement of the Merck Vioxx securities litigation. I have not received a 1099. Does this money need to be included when I file my 2018 income tax return? If so, how?
— Taxpayer

A. Here’s the story.

The tax treatment of a settlement or award payment will be determined by the “origin of the claim” doctrine.

“Under this doctrine, if a settlement or award payment represents damages for lost profits, it is generally taxable as ordinary income,” said Kenneth Bagner, a certified public accountant with Sobel and Co. in Livingston. “Similarly, a settlement or award payment received from an employer for lost wages and damages would likewise generally be ordinary income.”

But if the payment represents a return of capital destroyed or injured, the money received, to the extent it does not exceed the basis of the property, is not taxable, Bagner said.

“This latter case could occur where the settlement or award payment was the result of damages to the individual’s home or other property,” Bagner said. “I would assume this related to the person’s investment in Merck and therefore it would be a capital gain transaction.”

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This story was originally published in March 2019.

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