TurboTax

File with experts
File your taxes
Experts at your fingertips

An expert helps with your taxes, or does them for you
TurboTax Expert Full Service

TurboTax Expert Assist

TurboTax Self-Employed
Prior year taxes
File myself
File myself
Do it yourself

We'll guide you step-by-step
TurboTax Do It Yourself

TurboTax Self-Employed

TurboTax Desktop
TurboTax Free

Activate your product

Prior year taxes
Business
Business
Business taxes

Get your T2 corporate return done right, your way
TurboTax Business

TurboTax Business Desktop
Tax situations
Tax situations
Tax situations

Find extra guidance for your big life moves
For investors

For 25 and younger

For self-employed

For new to Canada

For life changes
Resources
Resources
Resources

Explore tax tools, get tips, and read reviews
Personal income tax calculator

RRSP savings calculator

Learning hub

TurboTax support (FAQ)

TurboTax community
Pricing

Level 2

Solved

Lemon law settlement taxable?

Forum|Forum|7 years ago
June 6, 2019
3 replies
0 views

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?

TurboTax Premier Windows

Best answer by PatriciaV

Expert Reviewed

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.

PatriciaVAnswer

Level 15

Expert Reviewed

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.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

skylinegtr2022Author

Level 2

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.

jenna6

Level 2

We just won a lemon law case for our car. We won $83,000, but only walked away with $60,600 and had to return the vehicle. We are trying to figure out if any of that is going to be taxed?

Here is the breakdown: Taking into consideration your total sales price, mileage offset, Mfg Rebate, and incidental damages your actual damages are $27,000.

Accordingly, there are $56,000 in additional damages here ($83,000 - $27,000). As explained, the additional damages have a 40% contingency fee per your retainer agreement. $56,000 x .4 = $22,400.

Therefore you will receive $27,000 + $33,600 ($56,000 - $22,400) = $60,600.

Lawyers will receive $22,400.00 + a motion for our attorney’s fees, costs and expenses.

Thank you!

abauman10

Level 2

Hello,

I am currently in the same situation you were in. Did you ever receive clarification on what your tax liability was? Were you taxed on the full $56,000 of additional damages or just the take home amount of $33,600? Thank you.

lissnad23

Level 2

I won the settlement. I bought a Van and I paid 10000 during a year then with the settlement I got back my 10000. so Only one year used the market value was higher. then, I guess this $10000 is not taxable but I got a 1099-misc how using turbotax can I do to don't declare ?

RobertG

Level 12

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

You need to report the 1099-Misc income to avoid getting correspondence from the IRS.

So you should enter it twice, once as a positive number, and once as a negative number to offset the income.

To report the income in TurboTax, enter 1099-Misc in the search box
Select Jump to 1099-MISC
Enter the information from the 1099-Misc
On the Does one of these uncommon situations apply? page select This was money from a lawsuit settlement
You will then be asked Do either of you have another 1099-MISC? Say no.
To offset this income go to Income and Expenses
Under less common income, select Miscellaneous Income, 1099-A, 1099-C.
Under Miscellaneous Income, 1099-A, 1099-C, select Other reportable income.
You will be asked for a description and amount, enter the lawsuit amount as a negative number to offset the gain.

The income, and the offset to income should appear on Schedule 1 line 9.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

chriswhitesmith

Level 2

You have sufficient evidence of where the proceeds came from since you had a lawsuit; you do not need anything further from the manufacturer. If it ever was questioned or asked about by the IRS, your legal documentation and court documentation would be more than enough to satisfy their inquiry.

Lemon law settlements are only taxable for the portion of your settlement received that exceeds your loss. You gave your figures of the settlement and the original cost of the vehicle, but not the fair market value of the vehicle at the time you bought it.

Use this formula to confirm it should be non-taxable:

PURCHASE COST (34,200)

- FMV OF "LEMON"

= LOSS

Now compare the loss figure above to the settlement you received. Any amount over the $20,300 received is taxed. If your loss exceeds the amount received, then it is non-taxable.

If there is a portion of it that is taxable, then just adjust your negative number input in your Miscellaneous Income section so you are only being taxed on the correct amount.

Please comment back with any further questions and we will assist you further.

@malcoman

I have the same situation and am wondering how would anyone know the FMV of the "lemon" at the time they bought it. Bought for 38k. Lemon law settlement was 65k which included paying off my loan. What is my loss/taxable amount? Never received a 1099. The fogginess of this subject is maddening. I've been everywhere trying to figure out how you know the FMV of a lemon when you bought it (assuming it's impaired when you buy it). If it's unusable then it's -0- and my loss is $38k - but if they paid off the loan, then how am I at a loss? SO confusing