Lemon car payment and no 1099

[Dontstopbelieving656]

I bought a new car and had endless issues right after purchase. Within 3 years the car manufacturer gave us 9k in consideration of all of the issues. The letter specifically references the car issues like the tail light, etc. The car was about 33k when purchased and our loan was around 39k. The car manufacturer is not sending us a 1099. Should we report and if so where do we place it on the return and how do we show we are not taxed. We kept the car.

[Vanessa A]

It depends.  If the $9k you received from the lemon law payment was to make you whole again, meaning you put $9k into fixing the car or it was reimbursement for towing and rental cars, then no, that would not be reportable as taxable income.

If part of the settlement was punitive and part was to make you whole, only the part that was not to make you whole would be included in your taxable income. In this case, if your tail lights and other problems were $6,000 and the $3,000  was punitive, then that $3,000 would be taxable. 

Your loan amount does not figure into the equation at all.  Only the purchase amount. 

If part of the settlement was not to make you whole again, then you would enter this as Other Reportable Income to get there select the following:

1. Federal
2. Less common income
3. Miscellaneous Income
4. Other Reportable Income
5. Enter the description and the amount you received that was not to make you whole again.

[Dontstopbelieving656]

The new car is a lemon. The paperwork does not include any language regarding being punitive. It really says it is in consideration of all of the car issues. Almost like the car is being discounted. Fortunately, I have not needed to pay out of pocket for repairs due to my warranty and the additional warranty I paid.

[Dontstopbelieving656]

I should also add the car has an issue that is unfixable.

[Vanessa A]

Then this would not be taxable income.  It is basically the manufacturer discounting the cost of the vehicle because it wasn't worth what you paid so they are "making you whole" by reducing the price to what the vehicle is worth.

What you will need to do is keep the paperwork they sent you for the settlement and reduce your cars basis by the $9k.  This will help if you decide to sell the car.  At that point you may have to report the sale if you make a profit.  Ex.  If you paid $30,000 for the car and then they send you a $9k check, your basis in the car is now $21,000.  If it is a personal vehicle you sell it tomorrow for $25,000, then you would have a gain of $4,000 that you would need to report on your taxes next year.  If you sold it for less than the $21,000, then you would not need to report anything. 

But for this year, you do not need to report the $9,000 you received.