@taxquestionasker85 wrote:
I like both answers and they seem to suggest the same concepts. However, one of them suggest the 15k is taxable to me. If my lawyer receives the 40k and he gets 1099'd, and then gives me the 25k, why would i pay taxes on his 15k? Reminder, i wont be getting a 1099 out of all this (because lawyer says its not requried, which i dont understand)
Because the settlement amount is $40,000 to you, and then you pay the lawyer.
If you need more detailed explanation, it's because the lawyer has no cause to get paid and no claim on the manufacturer except as your agent, someone who is working for you. The manufacturer is not paying anything to the lawyer as a lawyer, as the lawyer has provided no services to the manufacturer, the lawyer is providing services to you. It's your settlement money, the lawyer is getting a cut of your money.
Prior to 2017, you could take a partial tax deduction, but that was eliminated as a trade off for other changes like lowering the marginal tax rates for everyone. Now, you could only take a deduction as a business expense if this is a business owned vehicle (in which case all bets are off on taxability too, because you have to account for depreciation and other factors).
As for the 1099, I would expect the manufacturer to issue a 1099-MISC to you for the full $40,000, with the understanding that it is between you and the IRS to work out the taxable portion. Businesses are supposed to issue 1099s for payments over $600, but maybe there is an exception for Lemon Law settlements that I don't know about. If there is no 1099, then reporting any part as taxable is on the honor system, with the kicker that if you are audited, and the IRS finds you deliberately understated your income, the penalty is back taxes, plus 25% penalty, plus 1% per month from whenever they audit you back to the due date of the return, plus interest at 8% APR.
