The lemon law in CA stipulates that the defendant of a lemon law lawsuit is responsible for the legal fees for the law firm that is representing a plaintiff claimant. However, I was able to get a statutory offer from the defendant. I will of course receive the amount for my car (subject of the suit), but there is excess being proffered with the original purchase payback. That excess is to be split with the law firm representing me as a 55/45 split with the law firm receiving the latter percentage.
What do I pay taxes on? The entire excess value including the portion provided to the law firm? Or do I only pay taxes on the excess portion I keep? If it is the former, is the excess value that is paid to the law firm constituted as a legal fee? And if so, can it be deducted off my taxes?
All that said, what would be the tax rate for the excess funds? Is it taxed as income? If so, what is the rate I would have to pay in order to set aside the funds needed for tax season?
