Should I report a small settlement in a Lemon Law case? I never got a 1099-Misc. from anyone. My agreement doesn’t state anything about tax reporting. What do I do?

[paulette7]

The agreement does say I’m only allowed to share details with a tax accountant but no one else.

[ColeenD3]

 A lemon law settlement is only taxable for the part that exceeds your loss, which is the amount you paid compared with the fair market value of the 'lemon' at the time you bought it. Note that legal fees are not deductible.

[paulette7]

How are you supposed to determine the Fair Market Value of a brand new car you just drove off the lot a few days before?

[ToddL99]

If you just bought the car a few days ago, then the Fair Market Value (FMV) is what you paid for the car.

(We realize you might not be able to sell the car for that amount, but the purchase price is the most accurate measure of FMV for an item that is only a few days "used").

[paulette7]

Am I understanding this correctly:  since the amount of the settlement, in 2020, was only about 20% of what we paid for the brand new/fair market value of the “Lemon” car in 2019, then we do not have to report this as income on our Federal Taxes?  Or just the opposite?  

I’m still a little bit confused regarding our obligation.  Do we have to report this or not?  If so, where and does that include the total amount received, even what we paid the attorney who received the entire amount and then sent us a check for our percentage?  It will cut our refund in half.  Sorry for not “getting” this.

[DawnC]

Yes, taxwise the settlement is considered a reduction in the purchase price of the car and only the amount that exceeds your loss is taxable.    Not attorney's fees are not deductible, so those have to be included in the settlement amount when you make the comparison between the settlement amount and the FMV of the 'lemon' car.

If any part of it is taxable, the link below has instructions.   If it is not taxable, keep it with your records.  

• Where do I enter an award from a taxable legal settlement? 
• Are legal settlements taxable?

[paulette7]

Okay, I’m still having a language processing problem here. I am going to ask one simple question here but please read the entire conversation above.  Tax legalize can be difficult to understand.  

Do I have to report our Lemon Lawsuit settlement as Miscellaneous Income on our Federal & State (PA) Tax returns?  Yes or No?

Thank You.

[ColeenD3 · Accepted solution]

Yes.

[paulette7]

Thanks, I should have just asked the question the way I did in my last post instead of trying to figure out the process.  But I did manage to learn a few tax rules/legalize that I will not forget!  Your time and patience are very much appreciated.  😁