Lemon law settlement taxable?

[NSL89]

Hi @LenaH ,

What amount do I declare to offset the amount if ..  ?

Total Settlement: $70,000 ($25, 702.49 actual damages + $44,297.51 additional damages) + attorneys' fees

Recovery for total damages: $25, 702.49 

Recovery from additional damages: $24, 363.63 ($44,297.51 - $19,933.88 45% retainer agreement)

Attorneys' Fees and Cots: $19,933.88 + $41,500

Total to the client: $50,066.12

In addition, FCA claimed $88,716.49 in the 1099-MISC fee, which includes attorneys' fees that I did not receive.

Thank you for your help.

Thank you for the help.

[Opus 17]

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@NSL89 wrote:

Hi @LenaH ,

What amount do I declare to offset the amount if ..  ?

Total Settlement: $70,000 ($25, 702.49 actual damages + $44,297.51 additional damages) + attorneys' fees

Recovery for total damages: $25, 702.49 

Recovery from additional damages: $24, 363.63 ($44,297.51 - $19,933.88 45% retainer agreement)

Attorneys' Fees and Cots: $19,933.88 + $41,500

Total to the client: $50,066.12

In addition, FCA claimed $88,716.49 in the 1099-MISC fee, which includes attorneys' fees that I did not receive.

Thank you for your help.

Thank you for the help.

---

The taxable amount of any lemon law settlement is the amount that the payment was more than your original purchase price.   The offset would be whatever figure is necessary to make the net taxable amount equal to whatever was in excess of the purchase price.  The entire settlement must be considered, including attorney fees.  The entire settlement is income to you, and you are not allowed to deduct the attorney fees if this was a personal vehicle.  (You may be able to deduct attorney fees if this was a business vehicle, but the calculation of the taxable portion would be completely different as well.)  

You did not provide the purchase price, so I can't give you an answer.  

[NSL89]

Hi @Opus 17 ,

Thank you for the quick response. I purchased the car for $31,623.60.

[Opus 17]

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@NSL89 wrote:

Hi @Opus 17 ,

Thank you for the quick response. I purchased the car for $31,623.60.

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If your 1099-MISC shows 88,716.49, and you have no other adjustments that would affect the calculation, then enter the cost of the car $31,623.60 as your offset and the remaining $57,092.89 is taxable to you.

When considering the purchase price (cost basis) of the car, don't forget to include sales tax and any other government fees required to complete the purchase. 

[NSL89]

Thank you for the advice @Opus 17 !

[RichB69]

Does the IRS require that I attach documentation to my return to support the basis of the vehicle deducted?

[JohnW152]

No.  Just keep your documentation with your tax records.

@RichB69 

[cherryiss]

Does it matter if I kept the car or not?

I got a buyback settlement for $73,000 and the original cost of the lemon was $55,000.  It's a buyback so I had to return the vehicle.  So the result is that I had to use that money to replace my original vehicle, which actually cost more due to market conditions and inflation (exact same vehicle).

Is the cost of replacement taken into consideration? If so, how is that entered into TurboTax?

Thanks.

[Opus 17]

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@cherryiss wrote:

Does it matter if I kept the car or not?

I got a buyback settlement for $73,000 and the original cost of the lemon was $55,000.  It's a buyback so I had to return the vehicle.  So the result is that I had to use that money to replace my original vehicle, which actually cost more due to market conditions and inflation (exact same vehicle).

Is the cost of replacement taken into consideration? If so, how is that entered into TurboTax?

Thanks.

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You bought a car for $55,000 and you sold it for $73,000.  That's a capital gain transaction, you have an $18,000 gain that you report on Schedule D, and the gain is taxed as either a long term or short term gain, depending on whether you owned the care more than 1 year or less than 1 year.

It doesn't matter what you did with the money after you got it.  

[cherryiss]

@Opus 17 , thank you. How should I report that on TurboTax? I didn't receive a 1099MISC.

[Opus 17]

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@cherryiss wrote:

@Opus 17 , thank you. How should I report that on TurboTax? I didn't receive a 1099MISC.

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It's a capital gains transaction.   Go the section on Sale of Stocks and Other Investments.  There are several categories and then "something else" (basically, an "other" category).  Enter the transaction as if you sold the car to the insurance company or back to the dealer or whatever.  Purchase date, purchase price, selling date and selling price you should know.  (You can include any sales tax that you paid in the purchase price.  You can also include transportation if you paid to have the car delivered; you can include the fee you paid to the DMV to register and title the car.)  Only the gain (the difference between the payment and your cost) is taxable. 

Capital transactions include not just stocks, bonds and real estate, but also includes the sale of any tangible physical property for a gain or loss, including a car, antique furniture, and baseball cards.  Basically anything you can buy, hold, and later sell.  

[Devonn216]

I poked through this thread, but I don’t see incidentals addressed. In my situation, I have two options: 1) buyback or 2) replacement. Under both options I will be getting $27,000 for my out of pocket expenses (hotel bills, rental cars, and meals from various breakdowns; aftermarket parts that will stay in the vehicle when turned in). 

Under the buyback option I would get $66,000 (purchase price with all fees) + $27,000 for the aforementioned expenses = $93,000. Will this be taxed? 

Under the replacement option, I will get a brand new replacement vehicle + the $27,000 for the out of pocket expenses. It is likely that the MSRP will not be an exact match to my original vehicle. Will I have to pay tax on the MSRP difference and the $27,000?

thank you!

[Opus 17]

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@Devonn216 wrote:

I poked through this thread, but I don’t see incidentals addressed. In my situation, I have two options: 1) buyback or 2) replacement. Under both options I will be getting $27,000 for my out of pocket expenses (hotel bills, rental cars, and meals from various breakdowns; aftermarket parts that will stay in the vehicle when turned in). 

Under the buyback option I would get $66,000 (purchase price with all fees) + $27,000 for the aforementioned expenses = $93,000. Will this be taxed? 

Under the replacement option, I will get a brand new replacement vehicle + the $27,000 for the out of pocket expenses. It is likely that the MSRP will not be an exact match to my original vehicle. Will I have to pay tax on the MSRP difference and the $27,000?

thank you!

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Yes, the $27,000 is ordinary taxable income.  There's nothing you can deduct it from.  (And even if this was a business vehicle, that would be taxable income since it would represent a reimbursement of a previous tax deduction.)

Yes, the MSRP difference is also taxable.  

What I would do is report the sale of the car as sale of an asset, with a purchase price of $66K and a selling price of $99K (or whatever it was).  That will treat the difference as a capital gain, rather than ordinary income, so if you owned the car more than 1 year, it will be taxed at a lower rate than ordinary income. 

[schmange21]

Hi, I have been told by someone who also had a lemon lawsuit that you can deduct the interest from the new car bought due to surrendering your other car. Is that true?

1099-MISC $74,000

original lemon car cost - $58,000

Interest on new car financed also a write off?