Settlement due to overstated interest

[elfling]

Client received 1099-MISC, box 3, other income $842.57

This money, gleaned through a class action suit, is a refund from a overstated interest on a loan for a truck. The truck was strictly personal use. Never entered into a tax return in any way. Interest paid was not deducted on a tax return for any reason in any year.

Seems to me this is not taxable income. (Looking for confirmation of that thought.)

Should this somehow be shown on the return? A positve, then a negative? If so, how would you do it?

Elfling

(Linda)

[Margaret CPA in OH]

I think I would input on line 21 then, with explanation, deduct on line 21. I guess the 1099 was issued because the provider would not know whether there was a tax effect. At least if you report it somewhere, it will be matched and hopefully avoid a notice.

[jainen]

>>a refund from a overstated interest on a loan for a truck<<

It sounds like taxable income to me. In a settlement, there is generally NOT any agreement that the facts alleged are true, so you really can't show that this was a refund of interest. Put it on line 21 without any offset.

[Pacun]

>>a refund from a overstated interest on a loan for a truck<<

It sounds like taxable income to me. In a settlement, there is generally NOT any agreement that the facts alleged are true, so you really can't show that this was a refund of interest. Put it on line 21 without any offset.

I have noticed that H&R block charges extra if there an amount on line 21, can that be deductible without the 2% floor?

[grandmabee]

Why is this income taxble? It was never a business vehicle only personal. So if a refund of overstated interest or refund on cost of truck. still not income....

[jainen]

>>if a refund of overstated interest<<

I agree -- "IF."

The problem is the taxpayer probably can't support the position of it being a refund. That was only what some greedy lawyer wanted to claim, but the merits of that claim were never proven. It's almost a cliche that nuisance lawsuits are common. Since the defendent's cost of successfully fighting might exceed the claim, business prudence often is just to pay the extortion and move on.

That doesn't give our client the right to exclude the income, does it? So, as always, see what the paperwork says before you take a tax position. Remember, even the greedy lawyer agrees with the paper. Yeah, I know--we are not auditors and don't have to verify anything the client says. Well, that doesn't apply when the information is incomplete, and in my opinion it would be unprofessional to assume a client has a complete understanding of the terms of a class action settlement. If he says the defendent admitted guilt in the settlement, that's a potential inconsistency that can and should be resolved. Read the document.

[elfling]

Janien,

I have no question of the "IF" .... Letters from both the finance company and the truck dealership prior to the 1099 showing up clearly state refund of interest. Had client been charged the correct amount of interest in the first place he would not have a refund of anything. He simply would have paid $842 less for his truck.

I would not have expected that documentation from the finance company. But the letter from the dealership did not surprise me at all. Family-owned, small-town company that is attentive to thier customers. Had great experience there buying my latest vehicle.

Elfling