How to Write Off a Defaulted Personal Loan Loss on Taxes
If you are not in the business of making loans, when you make one to a friend or family member it is very disheartening if he fails to repay you. You may be able to "write it off" on your taxes if it meets certain qualifications. The loan cannot be a gift, you must have already included the money you made to make the loan as income on your taxes and you must know that the debt is bad--or, in other words, that it will not ever be repaid.
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Instructions
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Enter the name of the debtor and "statement attached" on Schedule D, Part 1, line 1, column (a) of your 1040 form. Place the amount of the bad debt in parenthesis in column (f). Use one line for each bad debt.
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Prepare a separate statement to attach to the 1040 form. Include a description of the debt, the amount and the date it became due. Write the name of the debtor and the relationship of the debtor to you--that is, any business or family relationship between you and the debtor. Include any efforts you made to collect the debt and when and why you decided the debt was worthless.
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Attach the statement to your 1040 form and file your 1040 form in the year following the year the debt became worthless prior to the due date for your 1040.
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Tips & Warnings
If you lend money to a relative or a friend with the understanding it may not be repaid, that is considered a gift. You cannot make a true loan to a minor child for basic needs.
A loan must be made with money you have already reported as income. For example, you cannot claim a bad debt for child support that is owed to you but remains unpaid.
If you fail to claim a loss on a bad debt in the year it became worthless, you can use form 1040 X to amend your return for the year that the debt became worthless. You must file the amendment within seven years of the date the return was due or within two years of paying tax on the money, whichever date is later.
References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
