Received 1099-MISC of lemon law settlement. How to prepare tax return

[yymmcc]

I received settlement payments from a lemon law lawsuit. The settlement paid me and my attorney $15000 in total. I received $5000 . However I received the 1099-misc form with box 10 saying $15000. How to correctly prepare tax return?

The suit was about a leased car. For which I paid about $5500 upfront for leasing for 3 years. No monthly payment was required during the lease period.
After ~ 2years use I filed law suit and returned the car to dealer (early termination)

[Mike9241]

this is from researching the subject.  My comments are underlined

For tax purposes, reporting a lemon law settlement involving a leased vehicle can be a bit tricky, especially when legal fees are included. Here’s how you can handle it:

1. Understand Tax Treatment:

   • A lemon law settlement is considered a reduction in the purchase price of the car.
   • Only the amount that exceeds your loss (i.e., the difference between the settlement and the fair market value of the ‘lemon’ at the time of purchase) is taxable.
   • Attorney’s fees are not deductible and must be included in the settlement amount when comparing it t...¹².

2. Reporting the Settlement:

   • You’ll receive a 1099-MISC for the settlement.
   • To report this income in TurboTax, follow these steps:
     • Search for “1099-Misc” in the search box.
     • Select “Jump to 1099-MISC” and enter the information from the form.
     • Indicate that this was money from a lawsuit settlement.
     • When asked if you have another 1099-MISC, say no.
     • To offset this income, go to Income and Expenses:
       • Under “Less Common Income”, select “Miscellaneous Income, 1099-A, 1099-C”.
       • Then choose “Other reportable income” and enter the lawsuit amount as a negative number to offset the gain.
       • The income and the offset should appear on Schedule 1, line 9.   
       • This part is incorrect unless you are self-employed. Your offset in my opinion, would only be the lease payments you made. In effect, you're going to pay income taxes on the fees the lawyer got. 

Here are other links that discuss lawyers' fees in lemon-law settlements.

https://ttlc.intuit.com/community/retirement/discussion/lemon-law-settlement-taxable/00/713428/page/... 

[yymmcc]

Thx Mike. I kind of understand your point. However for offsetting amount, how much it should be? In my case if the offset amount is my upfront lease payment $5500, then $15000-$5500=$9500 is the taxable amount. However you mentioned attorney fees are not deductible, which is $10000. Does this mean I should offset $5000?

[KrisD15]

What happened when you returned the car? 

Did they just keep your 5,500 and keep the car?

If so, the remaining settlement would be considered punitive damages and is taxable. 

The amount the attorney charged is included with the taxable amount. 

You lost 5,500

They gave you 15,000

You made 9,500 taxable unearned dollars.

There are no expenses to claim because you are not in the business of filing lawsuits. 

[yymmcc]

Thx for the reply @KrisD15. 
when the car was returned they took it  and refunded me nothing. Even I had to pay ~$200 for minor damages.

It was over 6 months after the time of returning the lawsuit became settled.

[yymmcc]

thx @Mike9241 Thx Mike. I kind of understand your point. However for offsetting amount, how much it should be? In my case if the offset amount is my upfront lease payment $5500, then $15000-$5500=$9500 is the taxable amount. However you mentioned attorney fees are not deductible, which is $10000. Does this mean I should offset $5000?

Besides, I'm still confused why I should pay taxes for the amount that goes to attorneys? 

[MonikaK1]

See this help article for instructions for entering a legal settlement in TurboTax. If only part of the settlement is taxable, 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 usually reported to the claimant on a Form 1099-MISC unless they represent another type of income, such as wages.

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.

In your case, based on the previous comments in this thread, the portion of the settlement that is not taxable is the amount that equals your lease payments. The rest is taxable.

See IRS Publication 4345 for more information about legal settlements.

Legal fees related to personal issues normally can't be deducted under current law (Tax Cuts and Jobs Act). See this tax tips article for more information and exceptions (business expenses, certain whistleblower and discrimination claims).

See this IRS article and  IRS Publication 4345 for more information about the tax treatment of lawsuit settlements.