It depends. If the $9k you received from the lemon law payment was to make you whole again, meaning you put $9k into fixing the car or it was reimbursement for towing and rental cars, then no, that would not be reportable as taxable income.
If part of the settlement was punitive and part was to make you whole, only the part that was not to make you whole would be included in your taxable income. In this case, if your tail lights and other problems were $6,000 and the $3,000 was punitive, then that $3,000 would be taxable.
Your loan amount does not figure into the equation at all. Only the purchase amount.
If part of the settlement was not to make you whole again, then you would enter this as Other Reportable Income to get there select the following:
- Federal
- Less common income
- Miscellaneous Income
- Other Reportable Income
- Enter the description and the amount you received that was not to make you whole again.
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