Tag: schedule d

Posted on by Jan Roberg

Personal Bad Debt

Empty Pockets

Photo by danielmoyle on Flickr.com

In my last post I wrote about how to write off a business bad debt on your tax return.  Today, I’m going to explain writing off a personal bad debt.  For example, say you loaned your brother-in-law $5,000 to buy a house and he never paid you back.  That’s considered to be a “non-business bad debt.”

 

The key to claiming a personal bad debt is being able to prove that you tried to get your money.  For example, I paid a boatload of money to send my son to college.  He’s not paying me back.  To be honest, I don’t expect him to – that college money was never meant to be a loan so I can’t claim a deduction for money that I was never supposed to get back in the first place.

 

If you’re claiming a personal debt, you’ll need to show that the money really was a loan, that you were supposed to receive payment, and that the payment was not and will not be received.


Evidence such as a signed loan agreement and copies of collection letters are going to be necessary.  You don’t have to take the person to court – especially if you know that even if you win the court case you won’t get your money – but you do have to show that you tried to get paid.   So, using the brother-in-law example, first you’d want a signed agreement showing that he intends to pay back the $5,000.  Your agreement should show how he’s paying it back, and when.  When he doesn’t pay you, you’ll want to send him a signed letter stating that you expect him to pay you.  You will want to send that correspondence via certified mail, return receipt requested.  This gives you evidence of trying to extract a payment from him.

 

Remember: Without some sort of evidence that the money really was a loan, and that you tried to get paid – you can’t claim the bad debt.


As far as the actual reporting goes, it gets reported as short-term capital losses on Form 8949 part 1 line 1.  (Back in the old days that would be schedule D.  It will still show up on your Schedule D when you’re done, but you’ll be inputting the information onto Form 8949.)

 

You’d write your brother-in-law’s name in column a.  You’d put $5,000 in column f (that’s your basis), and you’d enter zero in column e (because it’s worthless now since he ain’t payin’ ya.)  Make sure you check the box “C” because you’re not getting a 1099B form for this debt.

 

When you write off a personal bad debt like that, you’ll need to attach a statement to your tax return that has the following: a description of the debt, including the amount and when it became due, the name of the debtor and any business or family relationship that you have with him, the efforts that you made to collect the debt, and why you decided the debt was worthless. (For example – maybe your brother-in-law declared bankruptcy or may you know that legal action to collect the debt would probably not result in payment.)

 

Because it’s being claimed as a capital loss – you’re going to be limited to the same rules as other capital losses as far as the amount of the debt that can be used to offset your other income.  So if the loan is the only thing that’s going to wind up on your Schedule D – then you’ll only be able to claim $3000 of the loss.  The rest will carry over to the next year.

 

If you only take away one point of this blog post it should be that you must try to collect the payment before you try to claim the bad debt as a tax deduction.  If you don’t try to collect, then the IRS can treat the debt as a gift and you lose out.

Posted on by Jan Roberg

Five Tax Issues for these Crazy Financial Times

Wall Street

Photo by Sjoerd van Oosten on Flickr.com

Wow! The market’s up, the market’s down. It’s crazy! Now I don’t give advice about stocks—it’s actually against the law for me to give advice about stocks—but I do give advice about taxes. Here are some things you need to know about your taxes during all this market craziness.

1. On your tax return, you only acknowledge a gain or a loss if you actually sell the stock. Let’s say you own 100 shares of Billy Beer stock that you bought at $100 per share, that’s $10,000 worth of stock. If the price of the Billy Beer drops to $90 a share, then you have $9000 worth of stock right? So technically you’ve lost $1,000. But, the loss only counts if you actually sell the stock for the $90 a share. If you keep the stock, nothing about Billy Beer goes on your tax return.

2. Stocks that are held within a 401(k) plan or an IRA can be sold at a gain or a loss and it never gets reported on your tax return. The whole point of your retirement plans is that you can have tax free gains. Most of the time, your money is growing inside these vehicles and you’re not getting taxed on it. When you do have a loss inside your 401(k), you don’t get to claim a deduction for it.

3. The maximum loss from a sale of stock that you can use to offset your ordinary income (like wages) is $3,000. Let’s say you sold off some stock and had a loss of $10,000. Sales of stock are considered to be passive income or passive losses. (To be blunt—it’s called passive income because it’s possible to sit on your butt and make money.) The maximum amount of passive income loss you can have on your tax return for any given year is $3,000. Any extra loss you have can carry forward to the next year. You can use the passive loss from the sale of your stock to offset other types of passive income also, such as income from a partnership or rental real estate. The important thing to know though is that if you have a loss of $100,000 in the stock market, you’re not going to get to write it all off at once.

4. Just because the market has taken a nosedive, it doesn’t mean that you really have a loss on your stock. Remember, your gain or loss is based upon what you bought the stock for and what you sold it for. This is especially important for senior citizens to remember. Back in 2008, we had some serious stock market drops. When tax time came around, I had several clients tell me how much money they lost in the market, but when I did the paperwork they really had large gains because they had held the stocks for so long. They were very surprised to be paying so much money in capital gains tax.

5. You must report the sale of stock on a Schedule D form. One of the most common IRS letters is to people who sold stock and forgot to report in on a Schedule D form on their tax return. Stock sales are reported to the IRS. Using the Billy Beer example, let’s say you bought it for $100,000 back in 2007 and sold it for $90,000 this year but you forgot to report it on your tax return. You’ll get a letter from the IRS saying that you owe them $22,500 (if you’re in the 25% tax bracket) in income tax plus penalties and interest. (And the penalties will be huge because you “forgot” $90,000 in income!) The reality is that you should show a loss on your Schedule D and you’re probably due a refund ($750 if you’re in the 25% tax bracket.) Always remember to report your stock sales on your tax return.