Lemon Law Settlement Taxes

[JasonP3]

Hey All,

Currently in a lemon law case and was offered a settlement. I know that the excess funds from the vehicles price is taxable, but I'm trying to get a good understanding of how much I should put aside for taxes.

Hypothetical situation:

Original Car Value: $45,000

Settlement Amount: $90,000

Attorney's Fees: $20,000

When determining the taxable income would it be $45,000? or would it be $20,000 due to the lawyer taking their cut? Thanks in advance!

[Opus 17]

If the vehicle was used in business, the answer will be totally different.

For a personal vehicle, the gross amount over your cost basis is taxable ($45,000).  You are not allowed a deduction for attorney fees.  Then, your taxes on that amount are probably 22% federal (although could be less or more depending on your other income) and 3-13% state taxes, depending on the state you live in.

Also note, the basis is not the "original value".  The basis is what you actually paid.  So if your brother in law sold you a $45,000 car for $30,000, your basis is $30,000.  You can include certain fees in your basis if they were required to make the purchase, and would have been required even if you paid cash.  (In other words, any fees that are only due to financing are not part of the basis.)  Basis adjustments might include sales tax, and any required state fees to obtain a title.

https://www.irs.gov/forms-pubs/about-publication-551