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Level 1

Lemon law settlement taxable?

Still a little confused with Lemon law settlement tax. I'm receiving a lemon law settlement of about $27000 where $9,000 is going to the attorney. The value of the vehicle is currently $18,000 (Trade in value) and I Originally paid $43000 1.5 years ago with all taxes and fees. Is that $18000 taxable?


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Level 12

Lemon law settlement taxable?

It depends. A lemon law settlement is only taxable for the part that exceeds your loss, which is the amount you paid compared with the fair market value of the 'lemon' at the time you bought it

Subtract the fair market value from $43,000 and compare the result to the $27,000 you received. If your loss is less than $27,000, then the excess would be taxable. Note that legal fees are not deductible.

4 Replies
Level 12

Lemon law settlement taxable?

It depends. A lemon law settlement is only taxable for the part that exceeds your loss, which is the amount you paid compared with the fair market value of the 'lemon' at the time you bought it

Subtract the fair market value from $43,000 and compare the result to the $27,000 you received. If your loss is less than $27,000, then the excess would be taxable. Note that legal fees are not deductible.

Level 1

Lemon law settlement taxable?

Thank you! I don't have to report this on my tax this year since I recently settled. When I file my tax next year,  do I subtract the fair market value what the car is worth now or the fair market value when I file tax next year? What happen if I trade-in my car? And the trade-in value is less than selling the car privately. I can't sell the car because the Fair Market Value is a lot less than what I owed on the loan.
Level 12

Lemon law settlement taxable?

You need the adjusted fair value due to the "lemon" status of the vehicle. Your settlement paperwork may include this value. It doesn't matter what you do with the vehicle. The settlement is reported in the year when you receive the payment, with no effect on future tax years.
Level 1

Lemon law settlement taxable?

@TurboTaxPatriciaV Got it. Thank you!