1099-MISC for Calif Lemon Law

[JimLieb]

We bought a Chevy Volt in 2016 for $27,745. We sued in 2022 under the CA Lemon Law because GM couldn't/wouldn't deliver the repair part for 5 months. We traded the car in ($15K toward a new Bolt) at that point (Nov 2022). We got a settlement in Nov 23 for $15,000. The Lemon Law firm got $10K and we got $5K. The firm listed the total amount as "Total Cash and Keep Settlement Amount..." in the disbursement agreement. We got a 1099-MISC from that law firm with only box 10 filled in ($15,000). I entered box 10 value and clicked "continue" and got the "Enter Taxable Attorney Fees" page. It shows the $15,000 and wants me to enter "Taxable Attorney's Fees". Where do I go from here?

I did check the infobase but it seems to be applicable to previous years. One (June 24, 2020 11:16AM) indicates that I enter a negative number for the fees in "Other Reportable Income". Those steps don't match 2023...

[MonikaK1]

See this help article for instructions for entering a legal settlement in TurboTax. If only part of the settlement is taxable as explained below, enter the entire amount of the 1099 and then make a separate entry of a negative amount and name it "nontaxable portion of settlement".

Lawsuit settlements are normally reported to the claimant on a Form 1099-MISC, with the taxable amount or the entire amount showing in Box 1, not Box 10. You might try contacting the law firm to see if they will reissue the document. 

According to the Instructions for Form 1099-MISC, the payer should report in box 10 payments that:

• Are made to an attorney in the course of your (the payer's) trade or business in connection with legal services, but not for the attorney’s services, for example, as in a settlement agreement;
• Total $600 or more; and
• Are not reportable by you (the payer) in box 1 of Form 1099-NEC.

The amount in Box 10 is intended to be transferred to a Schedule C. This would not be correct for the situation you described.

Whether and how much of the amount of a legal settlement is taxable depends on the type of settlement proceeds you received and what they represented. Since you received a Form 1099, it should be accounted for on your tax return, as the IRS information return matching program will be looking for it.

Check the terms of the legal settlement. If you received punitive damages, this would be taxable income. 

Property settlements that compensate for a loss in value of your property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement. If the property settlement exceeds your adjusted basis in the property, the excess is income. 

See IRS Publication 4345 for more information about legal settlements.

Legal fees related to personal issues typically can't be included in your itemized deductions under current law. See this tax tips article for more information.

[JimLieb]

Given that the purchase price was $27K, I put $0 in the "Taxable Attorney's Fees" box. When I did the federal review it wants a Sched C. When I click the spot, it pops up a "link to Schedule C" dialog with a "Create new copy. Enter the Schedule C principal business or profession". I then did a review and I got more errors, namely the Sched C stuff. I started filling this out and got lost.

I looked at the disbursement sheet from the attorneys and it is "Total Cash and Keep Settlement Amount Including Client's Recovery and Attorney's Fees, Costs, (and expenses)".  It also states $5K to clients and $10K to the firm. There are no penalties paid by GM.

Per your reply, since there are no punitive damages, this means there is no taxable income, correct? How do I enter that since the Sched C doesnt' seem to fit.

[MonikaK1]

You are correct, the situation you described doesn't fit the entries on your form. Box 10 is for a payment to an attorney by a business for services rendered. This is why I suggested seeing if the payer would reissue the form.

in the alternative, you could delete the 1099 entry you made and enter the $15,000 as Other Reportable Income;  then, make a second entry with a negative number to reverse the amount, just to have the $15,000 accounted for on your return. Use the explanation fields to describe the payment.

To report the income as other than regular or recurring self-employment (so that it isn't subject to Self-Employment Tax), you can enter the amount under Other Reportable Income. In TurboTax Online:

1. Go to Wages and Income
2. Scroll down to Less Common Income
3. Go to Miscellaneous Income
4. Select Other Reportable Income and follow the prompts. Enter a description of the reason for the payment.

[JimLieb]

I don't have the option to have the law firm "do something else". GM sends them a 1099-MISC for the settlement and the firm essentially "forwards" it to me. There is no breakout of the fee and settlement proceeds because GM doesn't (want to) know. I did talk to the law firm and they essentially said that it is what it is and see a tax pro. They are just echoing what the online forums say, btw. 1099-MISC is for attorney fees which is what I paid.

Good point on the self employment tax. I don't know if a Sched C can happen without self employment. It's that or doing a misc income entry and leave the 1099-MISC dangling.

I'm still looking for a solution.

And I'm not using the online Turbotax.

[JimLieb]

Re: Did you get the answer you needed?

No I did not. Making the law firm change and use "something else" not 1099-MISC is a non-starter. First off, what they did is what the IRS tells them to do. Second, lemon law litigation is their wheelhouse. I'm not the only client. This is what they do for all clients.

In the end, something looking like Sched C because I have a 1099-MISC is what must be done. But "something" is not a solution. What do I do and how do I do it?

[DaveF1006]

Here is the best method to report this so that only the amount of the lawsuit is taxable but you won't be assessed self-employment taxes. 

1. Log into your account
2. Select Wages and income>other income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed.
7. Here say 1099-MISC-lawsuit Settlement and th4 amount.

@JimLieb 

[JimLieb]

What is the amount to put in the box? As I said before, this is a $15K settlement of which $10K goes to the law firm and $5K goes to us. In that the $15K was the current Kelly Blue book for the car at the time of the suit which is also what we got as a trade-in value. Various "lemon law" articles said that there is no tax unless there are punitive damages, i.e. like "pain and suffering" which would presumably exceed the purchase price. GM just bought back what they sold us in 2016 for $27K+. I was told the "basis" for the expense is the cost of the car when we bought it. Hence, $27K is bigger than $15K...

I currently have the 1099-MISC entered at this point with the $15K from box 10. Does that get removed or, as per one person's suggestion, box 8z of the Sched 1 gets a -$15K to "adjust it" to $0, i.e. no tax liability? After all, the $10K to the firm is their income and is taxable to them.

It all comes down to one thing and the method to enter it. Given all the circumstances I have reported in this thread, what if any is my tax liability? And where/how do I enter that?

[MonikaK1]

The form 1099 that you received is what the attorney needs to file (with the amount in Box 10), and not something you need to enter and report. 

If the payer issued a 1099 in your name and not the attorney's, then you should report the full amount of $15K on your return because the IRS information return matching program may pick it up. In your later post, you clarified that GM sent the 1099 to the law firm, which makes more sense based on the way it was completed. If you didn't receive any 1099 in your name / SSN, and the settlement is fully nontaxable to you based on your explanation, then you shouldn't need to report it at all and can just keep the documents in case they are needed later.

As I suggested in my original response, and as later mentioned by @DaveF1006, if the settlement is fully nontaxable to you because it is compensating you for your loss and not punitive damages, then delete the original entry you made. If you are going to enter it at all, enter it instead under Miscellaneous Income, then Other Reportable Income.

You would enter the $15,000 as Other Reportable Income;  then, make a second entry with a negative number to reverse the amount, just to have the $15,000 accounted for on your return. Use the explanation fields to describe the payment.

You do not need to complete a Schedule C. That reference is for the attorney who received the 1099 with $10,000 in Box 10.

[JimLieb]

I checked the 1099-MISC again. Payer is the law firm, recipient is me. This is just like the 1099-INT I got from my bank. I assume that GM sent one to the law firm and given payer/recipient, they just passed it on to me. I of course did not see it. We are back where we started. I finished the taxes input for both state and federal and the result is that I owe twice as much as I got in refunds last and previous years. I'm not concerned at this point because the analysis code flagged the 1099-MISC as an error. I had also entered a Schedule 1 "Misc Other Income" with $5K, the amount we received in the settlement which I will remove on the next iteration. This is still not resolved.