A bad debt occurs when someone owes you money and your efforts to get paid have failed. This is a term used a lot in business, but you can recoup some of a personal (nonbusiness) loss by claiming the bad debt on your tax return. For tax purposes, this is treated as a short-term capital loss.
In Tax Topic 453 - Bad Debt Deduction, the IRS offers a few considerations:
- Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.
- Use a separate line for each bad debt.
- A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. The statement must contain: a description of the debt, including the amount and the date it became due; the name of the debtor, and any business or family relationship between you and the debtor; the efforts you made to collect the debt; and why you decided the debt was worthless.
To claim a nonbusiness bad debt in TaxAct:
- From within your TaxAct® return (Online or Desktop), click on the Federal tab. On smaller devices, click in the upper left-hand corner, then choose Federal
- Click Investment Income to expand the category, then click Gain or loss on the sale of investments to expand the category
- Click Capital gain or loss (Form 1099-B)
- Click Add to create a new copy of the form or click Review to review a form already created
- Click Step-by-Step Guidance
- On the Investment Sales - Transaction Details screen, enter the name of the debtor as the description and fill in the appropriate dates. Check the box next to Check here if you are reporting a nonbusiness bad debt
- The program will proceed with the interview questions to enter any additional information required.