Alarm
Extension filers: Only left to file your taxes by October 17
Open
Hide Arrow

TurboTax / Tax Calculators & Tips / All Tax Guides / Tax Deductions and Credits / How to Report Non-Business Bad Debt on a Tax Return

How to Report Non-Business Bad Debt on a Tax Return

Updated for Tax Year 2015


OVERVIEW

Someone wise once said that you should never lend money to anyone if you expect to be paid back. The Internal Revenue Service (IRS) is sympathetic toward those who lend money — expecting repayment — but subsequently get burned. You can write off bad debts when this happens, even if you're not a business, but it's important to know the rules that apply.


Is it a debt or a gift?

Elderly man using a tablet

The debt must have been a bona fide loan— you gave the money with every expectation of being repaid. If you charged interest, and the borrower signed a promissory note, this provides a good indication that you expected to get your money back.

Otherwise, the IRS might consider the exchange to be a gift, particularly if the borrower is a friend or a family member. And gifts aren't tax deductible.

The debt must be worthless

The unpaid debt must be 100% worthless before you can deduct it. There must be no chance that the borrower can or will ever pay you back the amount of the loan. It is important to make a documented effort to collect your money with:

  • Letters
  • Invoices
  • Phone calls

If the borrower files for bankruptcy, this is clear evidence you can’t be repaid.

How to report the loss

The actual task of reporting a bad debt is relatively simple. The steps are:

  • Complete Form 8949 Sales and Other Dispositions of Capital Assets
  • Enter the amount of the debt on line 1 in part 1, and write the name of the debtor in column (a)
  • Enter your basis in column (e) – the amount of money you loaned
  • In column (d), write 0 – the amount the borrower did not repay

The IRS also requires that you attach a bad-debt statement to your tax return, explaining the details of the loan you made. You must deduct a bad debt in the year it becomes worthless. If you realize you could have reported and taken a deduction for an unpaid debt years ago but didn't, you generally have only three years to amend your return in order to claim it on your tax return.

How to deduct bad-debt loss

You can't take a deduction for a bad debt from your regular income, at least not right away. It's a short-term capital loss, so you must first deduct it from any short-term capital gains you have before deducting it from long-term capital gains.

Finally, you can deduct up to $3,000 of any remaining balance from other income. If a balance still remains, you can carry it over to subsequent years.

For example, if you lent someone $10,000 that will not be paid back, the deduction might work out something like this:

  • $10,000 original debt - $2,000 from short-term gains = $8,000
  • $8,000 balance - $2,000 from long-term gains = $6,000
  • $6,000 balance - $3,000 from other income = $3,000
  • $3,000 balance carried over to the next year = $10,000 deduction you can claim.

It may take a few years, but eventually you'll be able to claim the entire loss incurred on your tax returns.

Got investments?

From stocks and bonds to rental income, TurboTax Premier helps you get your taxes done right

For only $79.99*
Start for Free

Looking for more information?

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


Security is built into everything we do
Here's how
* Important Offer Details and Disclosures
  • Filing Deadline: IRS filing deadline for tax year 2015 is April 18, 2016 (except for residents of Massachusetts or Maine, where the IRS filing deadline for tax year 2015 is April 19, 2016).
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Free 1040EZ/A + Free State offer only available with TurboTax Federal Free Edition; Offer may change or end at any time without notice. Actual prices are determined at the time of print or e-file and are subject to change without notice. Savings and price comparisons based on anticipated price increase expected 3/18/16. Special discount offers may not be valid for mobile in-app purchases.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal e-file of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Savings and price comparison based on anticipated price increase expected 3/18/16. Prices subject to change without notice.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except the TurboTax Home & Business/QuickBooks Self-Employed bundle offers.
  • About our TurboTax Product Experts: Customer service and product support vary by time of year.
  • About our credentialed tax experts: Live tax advice service is available via phone for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Not available for TurboTax Business customers.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2014 TurboTax products.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.