Lemon Law

Forum|Forum|1 year ago
February 13, 2025
3 replies
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I received a settlement as follows:

Total damages and settlement - $170,197.50 (46,400.80 actual damage + $123,796.70 additional damages)

Recovery for Actual Damage - $46,400.80

Recovery from Additional Damages: $68,088.19 (123,796.70 - 55708.51)

Total to client - $114,488.99 (46,400.80 + 68,088.19)

Attorney fess - $55,708.51

How much of this is Taxable income and where do I enter it?

DavidD66

Can you clarify some things. What type of claim was this (i.e. what were the damages you incurred)? What do you mean by "additional damages"? Were the additional damages "punitive damages"?

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Opus 17

Employee

Your details aren't really clear. Let me state some general principles.

If you are reimbursed for repairs that you previously made, that is not taxable.
If they buy back the car, the payment is not taxable up to your original cost (including sales tax), but amounts over your original price are taxable.
Amounts awarded for other damages, punitive damages, and attorney fees, are taxable. And unfortunately, you can't deduct the attorney fees as an expense (unless this vehicle is owned by a business, in which case the attorney fees are a business expense). So you will pay income tax on the attorney fees even though you didn't keep them.

jsingh29Author

So, I got a car that had some serious defects.

I returned the car and got paid for replacement.

Additional damages was because I didn't have a car for few months.

DavidD66

You will report the taxable amount as Other Income. To do so in TurboTax Online:

Go to Income
Select "Miscellaneous Income, 1099-A, 1099-C". Depending on which version of TurboTax you are using, you may need to go to "Less Common Income" first
Scroll to the bottom of the page to Other Reportable Income
Other taxable income, answer Yes
Give a brief description of the income (Legal Settlement) and enter the taxable amount.

If you incurred costs (rental cars, Uber/Lyft rides, etc.) during the period you were without a car, you should deduct those from the taxable amount.

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Stefan1970

I assume this was a lemon settlement? The actual damage, sales price of the car with sales taxes, are not taxable. However additional damaged and attorney fees are taxable. In your example $46,400.80 would be non-taxable and $123,796.70

would be taxable. Attorney fees are only non-taxable for personal injury cases. Unfortunately, this always means that after paying taxes and deduction of attorney fees, not much remains of the additional settlement. If the car was a business asset however and the lawsuit was filed by the business, then attorney fees can be written off as legal fees of course.