@User 5012232 wrote:
After paying two additional months after the initial 36 month period, the GM dealership called and told me that I had to return the car/could not further extend the lease. That's what I did. I ended up not having my own car for several months thereafter. The purchase price of the original lease was $35,583.90. Over the 38 months I paid $9,528.12 in lease payments and $3,750.00 at the origination of the lease for a total of $13,278.12. According to the documents that I have and base on the 36 month lease, the residual value is $20,995.95. Do I still have to pay tax on the $15,000.00 total settlement of which I only got $5k? Thank you for the help.
Yes, some of the payment appears to be taxable.
Based on the purchase price and residual value, the price of the lease was $14,588. However, somehow you only actually paid $13,278, and that's if the interest rate was 0% APR. The Lemon Law settlement is treated as if you sold it back to the dealer for $15,000. Since you received $1,733 more than you paid, that is the taxable amount. It doesn't matter that 2/3 went to the attorneys, that's how the law works. (2/3 seems high, is that legal in your state? You might want to check with the state government agency that regulates attorney services.)
If the interest rate was, for example, 4%, then you paid about $590 of interest, and your principal payment was $8900 plus $3750 down, for a total of $12,650, meaning that $2350 of the settlement is taxable.
It depends on what you actually paid for the car over those 38 months, not counting interest.
