Tax Time Question

annie1956

15 years ago

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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Comments (11)

LuAnn_in_PA
15 years ago
"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.
sherwoodva
15 years ago
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.
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If you are part owner of the house, you are entitled to deduct the part of the mortgage interest that corresponds with the part of your ownership -- if half, then half. And your friend can deduct the other half. If you get audited, the only justification you would need to support your deduction is proof of home ownership as joint tenants and proof from the bank statement that the interest was paid. I do not believe you will be asked to "prove" that you actually personally paid the mortgage interest. The only time when such a proof would be required in an audit (I think!) is if there were suspicion of fraud, like if the total interest deducted by more than one person exceeded the actual interest paid. The IRS receives from the bank copies of the mortgage interest paid. So if the bank statment and the total deducted by you and your boyfriend are in agreement, there should be no problem. As to your other question, about the tax credit, go to the IRS website > and do a search on "first time home buyer" or some similar term. The website is vast, and it will probably take a lot of hunting before you find document you are looking for. Read it very closely to see if it addresses your particular situation. If it does not, you can take a chance and put in for a HALF tax credit, half because only you are a first home buyer, and hope for the best. But be prepared to be questioned on it, and be prepared to pay back the credit, if it was given to you, plus interest. Alternatively, you could call the IRS 800#, and ask your question. In my limited experience, the answer you get depends on your luck. You might get someone who knows the code well and can give you a helpful, informed answer. OR, you might get someone who will read to you verbatim the wording in the code that you yourself could get from the website. Don't forget the IRS code is very complicated, so complicated that even tax experts make mistakes.
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LuAnn_in_PA
15 years ago
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.
sherwoodva
15 years ago
Filing a police report is usually sufficient to show that you have tried to collect.
jaysgarden
15 years ago
There are two kinds of bad debts Ã¯Â¿Â½ 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 shortÃ¯Â¿Â½term 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.
Billl
15 years ago
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.
dreamgarden
15 years ago
"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?
annie1956
Original Author
15 years ago
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
dadoes
15 years ago
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.
jaysgarden
15 years ago
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"
randy427
15 years ago
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

Tax Time Question

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