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Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.
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
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.
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?
From what we have discussed, no, the $3000 was never received or claimed as income so it may not be deducted as a loss.
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 -
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."
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.