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Your answer is "possibly." But it's a really good question that deserves further discussion. Hopefully this answer can help both you as well as the many thousands of others affected.
After doing some research on this question, we agree with the conclusions reached by Mark Luscombe, a principal federal tax analyst for Wolters Kluwer Tax & Accounting (which is a well-known publisher of an authoritative professional tax research service used by many CPA firms).
He is quoted in the San Francisco Chronicle (website platform) as saying the following:
"In general, any settlement you get for something other than personal physical injury or sickness is taxable. Most other [legal] settlements, such as for back pay and punitive damages, are taxable. In the case of property, if the settlement merely restores your original value, it’s not taxable, but if it enriches you beyond where you were before, it is taxable.
Theoretically, owners who sold their VW cars back would not owe tax if the combined payment (trade-in plus cash payment) was less than their basis, which is generally what they paid for the car (or the depreciated basis if they used it in a business). If it was more than their basis, they could owe tax on the excess.
If they kept the car and got it fixed, the cash payment likely would not be taxable if the payment is designed to compensate them for lost value.
If they leased the car, the payment could be taxable because they had no basis in the car."
The source of this material can be cited as:
Thus, how you should treat your individual settlement with VW for tax purposes will depend on your own circumstances of vehicle ownership (e.g., personal, business, leased) and on your original cost of purchase, or depreciated basis (if the car is a business asset).
But, in most cases of (full) individual ownership, the payments received from VW are unlikely to be greater than the original value of the car, and so would be considered not taxable.
Thank you for asking this important and timely question.
Your answer is "possibly." But it's a really good question that deserves further discussion. Hopefully this answer can help both you as well as the many thousands of others affected.
After doing some research on this question, we agree with the conclusions reached by Mark Luscombe, a principal federal tax analyst for Wolters Kluwer Tax & Accounting (which is a well-known publisher of an authoritative professional tax research service used by many CPA firms).
He is quoted in the San Francisco Chronicle (website platform) as saying the following:
"In general, any settlement you get for something other than personal physical injury or sickness is taxable. Most other [legal] settlements, such as for back pay and punitive damages, are taxable. In the case of property, if the settlement merely restores your original value, it’s not taxable, but if it enriches you beyond where you were before, it is taxable.
Theoretically, owners who sold their VW cars back would not owe tax if the combined payment (trade-in plus cash payment) was less than their basis, which is generally what they paid for the car (or the depreciated basis if they used it in a business). If it was more than their basis, they could owe tax on the excess.
If they kept the car and got it fixed, the cash payment likely would not be taxable if the payment is designed to compensate them for lost value.
If they leased the car, the payment could be taxable because they had no basis in the car."
The source of this material can be cited as:
Thus, how you should treat your individual settlement with VW for tax purposes will depend on your own circumstances of vehicle ownership (e.g., personal, business, leased) and on your original cost of purchase, or depreciated basis (if the car is a business asset).
But, in most cases of (full) individual ownership, the payments received from VW are unlikely to be greater than the original value of the car, and so would be considered not taxable.
Thank you for asking this important and timely question.
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