Tax Time Question

annie1956January 17, 2011

Now that it's coming up tax time (again) I've got a question that is something new. Last year DH & I used an accountant for the first time in years, due to my Mother's passing and with the estate work I felt we needed professional advise for that and carried it over into our personal taxes with some of the inheritance. This year I may try to go back to doing our taxes again with the handy-dandy internet programs and save us the $450 since basically our income is not alot and we do not have alot of "stuff". But - we received the accountant's yearly questionnaire and one of the questions was "Does anyone owe you any money which has become uncollectable?" Well - yes.We sold some item's almost 2 years ago to a "friend" with a legitamite bill of sale ($3500) and he has yet to pay us a dime. He said he would make payments but never has even though we have contacted him many times. I just sent a letter to our lawyer. Do we think we will ever see any of this money - no. My question - is it really tax deductible? I know gambling losses are from casinos but this was not something that I would have considered.

Thanks

A

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LuAnn_in_PA

"My question - is it really tax deductible? I know gambling losses are from casinos but this was not something that I would have considered."

I don't think so.

I DO know that losses at casinos are not.
You can only claim a loss up to the amount that you have won and only if you itemize.

    Bookmark   January 17, 2011 at 11:28AM
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colorcrazy

Annie, yes, it is deductible. Sorry, I don't remember the details of whether you can take it all in one year or need to spread it out, but yes, you can claim it on your taxes.

You could also try taking your "friend" to court but it doesn't sound like that will help.

    Bookmark   January 17, 2011 at 11:50AM
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LuAnn_in_PA

But in order to deduct it, you have to exhaust all avenues in trying to reclaim it. Which means lawyers and courts, right?

That's why most people can't deduct it.

    Bookmark   January 17, 2011 at 2:02PM
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colorcrazy

Filing a police report is usually sufficient to show that you have tried to collect.

    Bookmark   January 17, 2011 at 5:54PM
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jaysgarden

There are two kinds of bad debts � business and nonbusiness.

The following are examples of business bad debts (if previously included in income):

Loans to clients and suppliers
Credit sales to customers, or
Business loan guarantees

A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full. You can claim a business bad debt using either the specific charge-off method or the nonaccrual-experience method.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.

A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless.

A nonbusiness bad debt is reported as a short�term capital loss in Part 1 on Form 1040, Schedule D (PDF). It is subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

    Bookmark   January 18, 2011 at 6:38AM
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Billl

This is one of those questions that you should really leave to a tax professional, not an internet message board.

Some bad debts are deductible. You just need to jump through the hoops.

BTW - if you go this route, there may also be tax implications for your "friend." I assume the friendship is pretty much gone after a big non-payment like this, but it is something to consider if this person is still in your lives.

    Bookmark   January 18, 2011 at 9:42AM
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dreamgarden

"This is one of those questions that you should really leave to a tax professional, not an internet message board."

Why not call the IRS and ask?

    Bookmark   January 19, 2011 at 1:56PM
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annie1956

Thanks - I may call the IRS. I questioned you all here first because it was something on the accountant's questionnaire. If everyone had said it was something totally business only I would just drop it. If it is something that we might be able to take I may also still use the accountant for our taxes as I would not be able to do this on my own.
It is definately a personal debt - not business. And I'm sure the "friend" is no longer a friend after the certified letter we sent a month ago asking for a phone call explanation as to why no payment after almost 2 years or no request for a payment plan. (Which we would gladly accept). So - if we have to go through small claims first to show that we have tried to collect - then I guess we will.
A

    Bookmark   January 19, 2011 at 2:27PM
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dadoes

Don't bet on IRS phone reps knowing the answer or being consistent on it. I've run into cases the IRS being wrong on reading their own rules, and of being passed back and forth between departments by a string of phone reps who couldn't find the answer to my question.

    Bookmark   January 19, 2011 at 6:17PM
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jaysgarden

You do not need to pay a tax proffesional at first.

Read the proper IRS schedule instructions and pertinent publications. Then if you can't interpret the info in those items then consult a professional.

Why not try and save a few $$$$.

Check Schedule "D"

    Bookmark   January 24, 2011 at 1:35PM
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randy427

IRS Publication 550 addresses non-business bad debts. It is reported on Schedule D.
"A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless."

Here is a link that might be useful: Topic 453 - Bad Debt Deduction

    Bookmark   February 3, 2011 at 2:46PM
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