Taxpayers who were wrongfully-incarcerated can now take advantage of the new retroactive exclusion from civil damages, restitution or other monetary awards received in connection with their incarceration. The retroactive exclusion is only available through Dec. 19, 2016, for tax years 2012 and earlier that would otherwise be barred in most cases. Eligible taxpayers must file Form 1040X for each year these payments were reported and write “Incarceration Exclusion PATH Act” at the top.
In general, taxpayers can amend their tax returns for tax years 2013 and after by filing Form 1040X within three years after the date they filed their original return. Going forward, there are no reporting requirements for receipt of an award qualifying for the wrongful-incarceration exclusion. This means, for the year an award is received, recipients need not report the award on their Form 1040 tax return or submit any documentation to the IRS.