Received 1099-MISC of lemon law settlement. How to prepare tax return

Forum|Forum|2 years ago
March 29, 2024
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I received settlement payments from a lemon law lawsuit. The settlement paid me and my attorney $15000 in total. I received $5000 . However I received the 1099-misc form with box 10 saying $15000. How to correctly prepare tax return?

The suit was about a leased car. For which I paid about $5500 upfront for leasing for 3 years. No monthly payment was required during the lease period.
After ~ 2years use I filed law suit and returned the car to dealer (early termination)

Not A Product Question

Mike9241

Level 15

this is from researching the subject. My comments are underlined

For tax purposes, reporting a lemon law settlement involving a leased vehicle can be a bit tricky, especially when legal fees are included. Here’s how you can handle it:

Understand Tax Treatment:
- A lemon law settlement is considered a reduction in the purchase price of the car.
- Only the amount that exceeds your loss (i.e., the difference between the settlement and the fair market value of the ‘lemon’ at the time of purchase) is taxable.
- Attorney’s fees are not deductible and must be included in the settlement amount when comparing it to the ‘lemon’ car’s fair market value ¹ ².
Reporting the Settlement:
- You’ll receive a 1099-MISC for the settlement.
- To report this income in TurboTax, follow these steps:
  - Search for “1099-Misc” in the search box.
  - Select “Jump to 1099-MISC” and enter the information from the form.
  - Indicate that this was money from a lawsuit settlement.
  - When asked if you have another 1099-MISC, say no.
  - To offset this income, go to Income and Expenses:
    - Under “Less Common Income”, select “Miscellaneous Income, 1099-A, 1099-C”.
    - Then choose “Other reportable income” and enter the lawsuit amount as a negative number to offset the gain.
    - The income and the offset should appear on Schedule 1, line 9.
    - This part is incorrect unless you are self-employed. Your offset in my opinion, would only be the lease payments you made. In effect, you're going to pay income taxes on the fees the lawyer got.

Here are other links that discuss lawyers' fees in lemon-law settlements.

https://ttlc.intuit.com/community/retirement/discussion/lemon-law-settlement-taxable/00/713428/page/2

Mike9241

yymmccAuthor

Level 2

Thx Mike. I kind of understand your point. However for offsetting amount, how much it should be? In my case if the offset amount is my upfront lease payment $5500, then $15000-$5500=$9500 is the taxable amount. However you mentioned attorney fees are not deductible, which is $10000. Does this mean I should offset $5000?