When it comes to writing off bad debt, it is important to both verify that your personal loan debt is deductible and provide the proper documentation to prove it. Once you have proven that the bad debt qualifies as a write-off, you will be able to receive some of the money that you haven’t been able to collect from the borrower.

Describing Personal Bad Debts

Basically, a bad debt is an account that was not monetarily compensated for. While this is extremely popular is a business sense, when goods or services are provided and not paid for, it can also occur in a personal aspect. If you lend money to someone and are not repaid, this can be considered a personal bad debt. To actually deduct the bad debt from your taxes you must have actually supplied the funds and not just promised them in the future.

Qualifications for Personal Bad Debt Write-Off

In order to write off a personal bad debt, it must meet a couple requirements. First, the debt must be the result of a loan you provided for someone. This does not include any monetary exchanges that were meant as gifts. Second, you must be able to prove the loan with documentation.

Documenting a Personal Bad Debt

It is important that you provide a copy of the original agreement for the loan. This should be written up with a signature from both parties. The terms of the loan as well as the payback agreement should be stated on the agreement. It is important to show that this was a loan, not a gift, and that it was expected to be paid back. Also, provide any documentation that proves you tried to recover the money owed. This may include letters, recorded phone calls or legal paperwork that shows you pursued the borrower.

Calculating Deduction

Once you have the proper documentation to back up your bad debt, you will need to calculate the amount that you can actually deduct. If the borrower has paid you back at all, it is important to document that with receipts as well as subtract it from the amount you are deducting. If receipts were not issued, copies of checks can be produced. Note that attorney fees or expenses to collect the debt cannot be included in your deduction.

Filing Your Taxes

When you determine the amount that you can actually deduct for the personal bad debt, you can file your paperwork. You don’t have to wait until the debt is completely uncollectible, especially if you have reason to think that the person may be filing bankruptcy soon. Form 1040 Section D can be used to fill out the amount you want to deduct. Attach a copy of the paperwork proving the loan to the form when you mail it in. Also, keeping several copies of the proof is a good idea in case there is question later on. The borrower will need to be sent another form as well if the loan was more than $600. The 1099 C form will be proof of income cancellation.

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