Lemon Law Settlement

[abauman10]

Looking for clarification on Lemon Law Settlements and what amount is taxed. Overall settlement amount is $40,000 in which $22,000 is my loss and $18,000 is under additional damages. Of the $18,000 my lawyer gets $8,100 (45%) and I receive $9,900 (55%). Will I be taxed on the full $18,000 or just the $9,900? If taxed on the full $18,000, is the $8,100 that my lawyer takes deductible?

[macuser_22]

Reimbursement of your cost is not taxable since you are only getting the money back that you paid for the vehicle.  Any punitive damages is taxable income.

If this was a personal vehicle then after 2017 attorneys fees are no longer deductible.    Business use vehicles might be deductible.

[abauman10]

Thank you for responding. Would you be able to clarify if I am taxed on the entire punitive amount ($18,000) or just my actual take home ($9,900) which is after my lawyer collects their percentage?

[macuser_22]

The entire amount.  The fact that you used the funds to pay an attorney does not change the tax.