Are Lemon Law Settlements Taxable?

If you have invested significant funds into the vehicle and the manufacturer has left you with a lemon product, you are most likely to seek a lemon law settlement. One of the issues here is whether the lemon settlement is subject to taxes.


What if my vehicle doesn’t qualify as a “lemon”?

You need first to check whether your vehicle meets the lemon law settlement criteria. It may have defects, but technically not meet the criteria to qualify as a “lemon” (e.g. “mileage offset”). If it does not entitle you to a lemon law settlement, your award may be for vehicles diminished value. This is a monetary compensation; you receive it for the vehicle problems that you have incurred. In this case, the settlement you receive is non-taxable.


What am I entitled to if my vehicle is a “lemon”?

In case your vehicle fully meets the criteria for lemon law settlement, the “Repurchase” and “Replacement” remedies are available.

Lemon Law Repurchase

  • If a manufacturer cannot repair a vehicle with a significant defect within a “reasonable number of attempts,” you are entitled to repurchase of the vehicle.
  • As a lemon law settlement, you may receive a full refund. However, you need to deduce from this amount any rebates you receive. Note, that the lemon law statute defines a specific formula to calculate the “mileage offset” for the vehicle used by the buyer.
  • Compensation may cover a full refund of the down payment, monthly payments, and a loan refund. These fees are calculated based on the remaining loan balance and other payments.
  • Under repurchase settlement, you are entitled to vehicle contract price coupled with the vehicle taxes, registration fees, and other payments.
  • Full compensation for incidental damages is also available. This means that the court may award you the money you had to spend in connection with the lemon vehicle.


Lemon Law Replacement

  • This scenario is optional for both the consumer and the manufacturer. It means that the manufacturer cannot force you to accept the replacement. Respectively, the consumer cannot force the manufacturer to make the replacement deal.
  • If the manufacturer replaces the defective product, he offers the consumer a comparable vehicle. In this case, the replacement vehicle is substantially similar to the original vehicle or newer with similar
  • Most importantly, the manufacturer is obligated to pay all the collateral charges that accompany the sale. This includes all the sales tax, license and registration fees, and any other statutory fees associated with the sale.
  • Under lemon law settlement, the replacement also covers incidental damages and consequential expenses caused by the malfunctioning vehicle.
  • Be aware, that the difference in price for a replacement vehicle and any usage fee for the time that the lemon vehicle had no defects may be taxable to you.


What about the non-monetary settlement and attorney fees?

Regardless of whether you choose the repurchase or replacement scenario, you are entitled to compensation including all the amounts described above. However, courts may be reluctant to award damages for lost wages or lost time in connection with the malfunctioning vehicle.

Also, a lemon law settlement is taxable only for the portion that exceeds your loss. In this case, you need to refer to the fair market value of the lemon vehicle at the time you bought it.

Last, but not least, lemon law settlement permits you to recover the attorney’s fees and expenses. This means that attorney fees are not taxable income to you. Once you win the case, the manufacturer will have to cover the attorney fees and related expenses.

Our highly qualified attorneys at Margarian Law are determined to reach a successful settlement for your case so that you don’t pay attorney fees. We are specialized in lemon law cases and will make every effort to reach a positive outcome for you. Claim your free consultation now and we will determine whether you qualify for lemon law.

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