1099-MISC for Calif Lemon Law

Forum|Forum|2 years ago
March 4, 2024
2 replies
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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...

Monikak11

Level 2

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.

JimLiebAuthor

Level 2

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.

Monikak11

Level 2

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:

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

JimLiebAuthor

Level 2

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.

JimLiebAuthor

Level 2

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?