From TTB 1040 Ed p 3-21 • Class action and other settlements for consumer
goods or services if amounts were not deducted
in an earlier year. This is listed under examples of nontaxable lawsuit proceeds.
OK now for the facts of my case. Everyone involved is a client. Adult son who is not dependent receives $100 from a class action settlement against McKesson for charging too much for prescription drugs. Son did not deduct the costs of these drugs. However Son has for some time met all of the tests to be a qualifying relative of parents except gross income and therefore PARENTS have both paid and deducted all of Son's medical. Check has not been cashed and I am being asked what should be done. All are agreed that the son is going to actually keep the money but all want the party if any who should be taxed on the money to report it and be taxed. I can think of three possibilities and I invite any to suggest others.
Son does not report the money as taxable to him because after all he did not deduct the expenses which are being refunded.
Son reports the money as taxable because he knows that his parents deducted it.
Son reports it as nominee income (line 21?) and issues (1099M?) to parents who report it because they deducted it.
We all know that my first option is what most clients would actually do if no 1099M was received and they'd probably get away with it. But like many of my clients these people want to do the right thing and I am leaning toward number three but I want to make sure it is actually necessary to do that and the middle one wouldn't fly if there were an audit.
goods or services if amounts were not deducted
in an earlier year. This is listed under examples of nontaxable lawsuit proceeds.
OK now for the facts of my case. Everyone involved is a client. Adult son who is not dependent receives $100 from a class action settlement against McKesson for charging too much for prescription drugs. Son did not deduct the costs of these drugs. However Son has for some time met all of the tests to be a qualifying relative of parents except gross income and therefore PARENTS have both paid and deducted all of Son's medical. Check has not been cashed and I am being asked what should be done. All are agreed that the son is going to actually keep the money but all want the party if any who should be taxed on the money to report it and be taxed. I can think of three possibilities and I invite any to suggest others.
Son does not report the money as taxable to him because after all he did not deduct the expenses which are being refunded.
Son reports the money as taxable because he knows that his parents deducted it.
Son reports it as nominee income (line 21?) and issues (1099M?) to parents who report it because they deducted it.
We all know that my first option is what most clients would actually do if no 1099M was received and they'd probably get away with it. But like many of my clients these people want to do the right thing and I am leaning toward number three but I want to make sure it is actually necessary to do that and the middle one wouldn't fly if there were an audit.
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