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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3344
Experience:  15+ years tax preparation and tax advice.
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Settled an 8,000 lawsuit on a bank crdit card program for 5,000

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Settled an 8,000 lawsuit on a bank crdit card program for 5,000 - I know I must report the 5,000 as income but may I take the 3,000 as a loss ?? settlement was out of court
Submitted: 3 years ago.
Category: Tax
Expert:  Wendy Reed replied 3 years ago.

Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.

 

Hello there,

 

If the $5000 is considered some type of punitive damage (punishment) then yes, the $5000 is taxable. In order to determine if you have a loss, you would have to assess what the $3000 represents. Did you lose $8000 that you paid to this company and the $5000 is a reimbursement of your loss? (In this case, the $3000 may be able to deducted as a bad debt) ---however, the $5000 in this case would most likely not be taxable since it is a refund of after tax money.

 

If the issue was that you were suing for $8000 for punitive damages and settled for $5000, then the $3000 would not be deductible as a loss because it does not represent a loss of money that you have ever paid tax on.

 

I know this is a confusing subject, please let me know if you need additional clarification

Customer: replied 3 years ago.
the 8000 of earnings was earned over a 3 year period of time
Expert:  Wendy Reed replied 3 years ago.
So is this $8000 that you should have earned from participation in the program? If so, then the $3000 is not deductible because you have never claimed the $8000 as taxable income. This would be the same as if you were not paid some of your salary at a job, or you did not receive rent that your tenant was supposed to pay you. The tax law does not allow for deduction of income in these situations.
Customer: replied 3 years ago.
Thank you again for your so prompt reply - The 8000 was given based on the use of the credit card - it was earnings to either the bank or the credit card company - it was set up on my monthly bank statement for my use at the time of my purchase of a new car - I purchased the required make and model new car and they refused to apply the 8000 - I then started a lawsuit and settled for the 5000 just to resolve the issue I am 81 years old and the settlement was the max I could get in small claims court -
Expert:  Wendy Reed replied 3 years ago.

Hello again,

 

I am sorry for the trouble that you had regarding your credit card company and I empathize completely.

 

However, since the $8000 of earnings is considered a taxable benefit to you as a part of an earnings program, the $3000 that you did not receive cannot be deducted as a loss---even though you did not receive what you were supposed to.

 

The only way that the $3000 could be deducted as a loss would be if you had already claimed or reported the $8000 as income, and then you would in effect be deducting a loss of income that was already reported. Since you are only reporting the $5000, you can't deduct the $3000 that you didn't receive.

 

I know it is frustrating, I wish I had a better answer for you.

Customer: replied 3 years ago.
Thanks again - one last qustion - if they had paid the 8000 would I have had to report it as income? are all credit card programs [ coupions like LLBean - cash like Discover - etc] that are based on use of the card income to the card holder??
Expert:  Wendy Reed replied 3 years ago.

I am unaware of any credit card program that pays you as much as $8000. However, if the $8000 is considered a "rebate"---then it would not be taxable to you, it would be a return of your cost of the car. Rebate rewards, even in the form of cash, represent a return of purchase price, and the IRS has determined that rebates are not generally taxable (Unless the person has already deducted full cost before receiving rebate).

 

A similar question is air miles. The IRS had issued an announcement stating that free trips earned with miles are not taxable, however, that this type of relief from taxation does not necessarily apply to cash: http://taxes.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=taxes&cdn=money&tm=2&gps=503_136_1259_846&f=20&tt=13&bt=0&bts=0&zu=http%3A//www.irs.gov/pub/irs-drop/a-02-18.pdf

 

If the program is merely an interest program (similar to Bank of America's keep the change program) then the funds you earned would be considered taxable.

 

You stated earlier that "I know I must report the 5,000 as income"---where did you get this information?

 

Customer: replied 3 years ago.
I was asked to sign a tax form before the bank would issue the settlement check - the lawsuit was against the bank only as the credit card company did not have a local office - we filed the suit in State court against the bank that had a local address - the bank settled the lawsuit not their card company - the bank denied libility but the bank monthly statement indicated the earnings that they claimed belonged to the card company, each month on my bank statement.
Expert:  Wendy Reed replied 3 years ago.
If the settlement represents earnings--similar to interest, it is taxable. You will most likely get a 1099MISC form showing the settlement. The IRS will get a copy also.
Customer: replied 3 years ago.
but the credit card agreement clearly states that I do not own the earnings???
Expert:  Wendy Reed replied 3 years ago.
I'm sorry that I'm not following your reasoning. Whether you are receiving this money from the bank or the credit card company, you do in fact own the settlement. Without reading all of the information pertaining to your case, it is difficult for me to know with 100% certainty whether or not the amount will be taxable--but from what you have described it seems that it is taxable--because you are receiving cash, it is not a rebate for the purchase of the car, and it is considered earnings--similar to interest.
Customer: replied 3 years ago.
Thank you for the help - may we go back to the begining - I have no problem with the 5000 being taxed as income - my question was - when I settled out of court on an 8000 account that was due me for 5000, may I take the 3000 difference as a loss on my tax return?/
Expert:  Wendy Reed replied 3 years ago.

From what we have discussed, no, the $3000 was never received or claimed as income so it may not be deducted as a loss.

Customer: replied 3 years ago.
but was not the 8000 a contract, obligation to pay by the bank or credit card company, that amount towards my car purchase? they defaulted, I brought suit because they did not do as contracted - I settled their 8000 contract for 5000 - does not that leave a loss of 3000 to me- if they had paid the 8000 to their car dealer would it have been income to me, the card company [ since I never owned it] or their car dealership?? The card holder agreement maks it very clear that I do not own the 8000 in acculumated earnings - just that they would be applied toward the car purchase from their car dealership - - sorry to be such a pain
Expert:  Wendy Reed replied 3 years ago.
I am sorry, I think we have beaten a dead horse here. If you would like another opinion from another expert, please let me know.
Customer: replied 3 years ago.

Wendy - I am sorry that I may have not provided all of the info on this matter up front - this all started with a credit card unsolicitated offer for me to earn 5% of their credit card use toeward the purchase of a new GM car in which I had up to 7 years to accumulate the monies for that purchase- after 4 years I had accumulated 8300 in earnings per the credit card Banks monthly statement and decided to buy a new GM car only to find that the program had changeg and they would only allow a part of the so called earnings to be applied to the purchase - I rejected this and brought suit against the bank for 5000 in small claims court and purchased a Chrysler product - I took suit against the Bank as it had an office in the District while the Card Company did not and 5000 was the limit in small claims - The Banks monthly statement that they sent each month included in part info on these so called earnings accumulated balance - but in the law suit in the fine print in the card aggrement it was pointed out that the card company owned the so called earnings, and that I did not except toward the purchase of a new GM product and at the card companies discression - the Bank did take over the lawsuit and I settled the 8300 so called earnings balance on the last statement for the 5000 small claims court limit -

There is no question that I had earned the 8300 - there is no question that the 8300 was not earnings that I could obtain as such - and since I settled the 8300 credit card earnings balance for 5000, does that not indicate a 3800 loss.

Thanks again for your response -

 

Customer: replied 3 years ago.
please read the above thank you
Expert:  Wendy Reed replied 3 years ago.

I understand the situation. The tax law allows for deductions of certain losses, but even when it does, you are generally limited to the lower of the fair market value or the adjusted basis in the property which is lost....You have no basis in the $3300 because you never received it. For tax purposes, you can't deduct income that you never received. The only way you could deduct this would be if you claimed it in a prior year as income.

 

I found a similar type of question on a website where it is explained that "Since you never reflected income for receiving these benefits, you can't deduct their loss."

 

http://webtradecenter-legal-forms.com/9250/through-bankruptcy-i-lost-earned-nonqualified-pension-can-i-deduct-the-loss/

 

 

I am going to opt out of this question. As you can see, another expert already agreed with my answer, but maybe another expert may be able to assist you better.

 

I am truly sorry that I couldn't help you.

Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3344
Experience: 15+ years tax preparation and tax advice.
Wendy Reed and other Tax Specialists are ready to help you

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