Have you lost money to a loan that you will never collect? If you answered yes, the good news is you're not alone. Many of us have lent money to a friend or relative at some point.
And first intention may have been good, there are times when things do not go according to plan. Payments stop coming, and finally, you realize that you'll never see your money again.
While you get in this situation is unfortunate, you might be able to take solace in the form of a tax deduction - .. even if you do not own a business
If the amount lent is a large sum, it is possible to absorb money in the year the debt is uncollectible
Here's how.
Identify if it is bad or business nonbusiness debt
bad debt business is exactly how it sounds. - Debt that has just operated a trade or business.
Poor nonbusiness debt is basically nothing else. If you lend money from your personal bank account to a family member, and he or she will repay you is nonbusiness bad debt.
Determine whether you can apply for bad debt on your tax return.
to claim a nonbusiness bad debt as a deduction on your tax return, the debt must have been declared fully irrecoverable.
a debt is uncollectible after trying all reasonable means to collect on her and were unsuccessful. It is also considered uncollectible if the borrower files for bankruptcy and the debt is discharged.
Once nonbusiness bad debt is uncollectible, it is then considered completely "worthless", which means you have no chance of being repaid, and you can provide proof that you are guaranteed debt to protect your investment. At this point, you can deduct the bad debt on your tax return.
However, if you secured debt as a friend, no consideration in return and the debt goes wrong, then it is considered a gift rather than a loan. And as you might be able to guess, gifts can not be used as a write on your tax return that nonbusiness bad debts.
your bad debt paper.
To take a tax deduction for bad debts, you must show that you have a legal debt and you can not win on it. Be sure to keep track of the following information:
- Note or agreement proving that you have a legal binding debt You do legal paperwork mountains, but you. need to have at least one document showing he had an agreement with the borrower that you had to pay. Otherwise it will be determined that you made a nondeductible gift. An oral agreement can be allowed, but writing is always better.
- debtor name . Make sure to include information or its business relationship with you.
- Documents indicating your basic debt . Keep track of the amount of money that you lent. You can not take a deduction for bad debt for the money you never received, as uncollected child support.
- Documentation showing that you have tried to collect on the debt. letters, emails and phone calls notes are examples of documentation that will work.
- additional documentation indicating why the debt is worthless . For example, if the borrower goes bankrupt, you'll want to keep this documentation. You can not deduct the debts if they are totally worthless.
Enter the bad debt on your tax return.
While having a bad debt is never a good situation to be, you have a few options to help offset the loss.
But there are a few details to pay attention.
to deduct a bad debt, you must have included the amount in your income or loaned cash
for example, you can not claim a bad debt for the money you were expecting receive for the repair of cooling your sister - although it has promised to pay. You need hard evidence to prove the reimbursement was understood by all parties, and the debt must be declared totally worthless.
If you are able to claim the bad debt on your tax return, you must complete the Form 8949, Sales and other capital provisions.
The bad debt will be treated as a loss of short-term capital by first reducing capital gains in your statement, then reduce up to $ 3,000 of other income, such as salaries.
If you can not take the full deduction in the year of loss, you can refer to later years.
If you have already filed a return for the year in which the debt became worthless, the file Form 1040X, Amended US individual income return Tax , with Form 8949.
for seven years from the due date for your original tax return to file a deduction for bad debts bad or two years from the date you paid the tax for this year, if is later.
What happens if a bad debt comes back to life?
Say you have given up to repay a loan and decided to take a tax deduction for nonbusiness bad debt.
If you collect later on this debt, some or the entire amount that you received may be considered taxable income to you.
However, you must pay income tax on the amount of bad debts that effectively reduces your taxes.
This could end up being less than the amount you claimed when you file your return with the deduction of bad debts.
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