Cash and Keep Lemon Law settlement

[Ajt116]

Hello!

I’m starting to think about questions that will be needed for filing in a about a month or so. In 2021 I received a “cash and keep” settlement for lemon law regarding a vehicle I have.

it is a lease, that had several issues for months and months leading up to the settlement. My question is, I received $8500 from the lawyers. They got a total of $11000.00 and kept $2500 in fees and issued me a check for $8500.

When I leased the truck, I put about $2000 down in cash, as well as had $4000 in positive equity from my trade in (so $6000 down) and then I paid like 6-7 payments of $400 before the settlement which equals way more than the $8500 I received. I still have the vehicle, and when I turn it in at the end of the term, I will get nothing back. 

Would this $8500 just be considered a “refund” or reduction in the lease price? Since I paid more than that for my down payment and monthly lease payments, I’m honesty clueless how this would work. Since leasing is essentially just giving money away and receiving nothing back once I return it.

thanks!

[DianeW777]

It depends.  The full settlement will be considered your income, including the portion paid to the lawyer. However, if it is a true lemon law award, lemon law settlement permits you to recover the attorney’s fees and expenses. This means that attorney fees are not taxable income to you. Once the case is settled in your favor, the manufacturer will have to cover the attorney fees and related expenses.

A lemon law settlement is taxable to the extent that it exceeds your cost basis in the vehicle lease.  Check your documents to be sure that 'lemon law' is referenced or check with the attorney for confirmation.  Once the Form 1099-MISC is received you will know exactly what amount considered as your total settlement.

Enter it twice, once as a positive number, and once as a negative number to offset the income (or the total of your cost if different than the settlement amount).

1. To report the income in TurboTax, enter 1099-MISC in the search box (enter the dash)
2. Select Jump to 1099-MISC
3. Enter the information from the 1099-MISC (amount and description)
4. On the Does one of these uncommon situations apply? page select This was money from a lawsuit settlement
5. You will then be asked  Was any part of the settlement for back wages? answer no.
6. Next question will be Do either of you have another 1099-MISC? Say no.
7. To offset this income go to Income and Expenses
8. Under Less Common Income, select Miscellaneous Income, 1099-A, 1099-C.
9. Under Miscellaneous Income, 1099-A, 1099-C, select Other reportable income.
10. You will be asked for a description and amount, enter the lawsuit amount as a negative number to offset the gain (example -8000)
11. See the image attached for assistance.

[Ajt116]

Hello,

the check was issued by the lawyer, I never received anything from the manufacturer personally. The $11,000 was issued to the lemon law attorney and then they took their portion and sent me a check for $8500. The case was won in my favor and settled, the lawyers stated I will not get a 1099 and only they will. Nothing gets issued to me since the lawyers handled it all for the State of Ohio. I will most likely just need to go to a tax professional to get this handled as I’m honestly not sure how it will get handled. Since it is a lease and I kept it, all of my down payment and monthly payments will just be given away essentially and when the lease is over I just give the car back and lose all my monthly payments and down payment. I wasn’t sure if the $8500 would then just be a reduction in the sale price since I paid more than that to own the vehicle over the term. 

thank you!

[DianeW777]

To summarize your transaction read below.

The lease allowed you to file the lemon law suit to obtain some of your money back since, I assume based on your information, the company where you leased the car would not exchange this truck for another. That being said, it will be a reimbursement of your cost and should not be taxable to you.

Be sure to maintain all of your records and use the instructions provided to enter your transaction if you should receive a Form 1099-MISC.  I understand you believe you will not receive one, however you should be prepared  should that happen.

And, keep in mind you can use our Tax Experts to prepare your return and it's a good idea to do that for this year for peace of mind.