How do I claim a nonbusiness bad debt in TurboTax?

[elliotstonertaxe]

The bad debt occurred in 2018 so I just need to claim the rollover. I've seen some articles here that mention selecting "Uncollectible Debt (Nonbusiness Bad Debt)" from a dropdown in the Capital Gains/Losses section, but that option isn't there. Also, there seem to be so many more fields than necessary - I would have expected there to be a different section for a bad debt, especially if they're going to make me pay $70 to be able to claim it.

[Anonymous_]

Basically, this is simply a short-term capital loss that is reported on Form 8949.

See https://turbotax.intuit.com/tax-tips/irs-tax-return/how-to-report-non-business-bad-debt-on-a-tax-ret...

However, since the loss occurred in 2018 and was not used in that tax year, you just need to carry it forward as a short-term capital loss. TurboTax should do that for you if the 2018 return was transferred in, but you can also enter capital loss carryovers in the Investment Income section of the program.

[Boyan]

Hey guys,

I too have noncollectable debt as a creditor (house remodel contractor, sued, won, lean, zilch at the end) which occurred in 2010 - that's a decade ago.

Is there a limitation on when I can consider it noncollectable (which I now have) and is there a limitation on WHEN to claim it?

In terms of the TT mechanics, it seems that the software has changed so where do I exactly trigger the process of entering the bad debt (as some have clarified it is a short term investment loss)? @elliotstonertaxe if you have found where that drop list is please share it with all of us. Also what's the $70 for? Small claims filing fee?

Thank you

[DaveF1006]

You would need to claim it in 2010 by amending your 2010 return because that is the year you would need to claim it. However this may be pointless because you can only submit amended returns for refunds no more than three years from the date you filed your original tax return. You can also file it no more than two years from the date you paid the tax, if that date is later than the three-year rule. 

[Boyan]

@DaveF1006 Thank you for the quick answer but I respectfully beg to differ. The decision of WHEN a debt is eligible as a tax write off rests with the creditor at the creditor's discretion of the moment in time when one, somewhat arbitrarily so deems the debt to be worthless, un-collectible, etc,

Either way 2010 will NOT be the year to claim it as a tax write off since that is when the initial transaction occurred. Since the debit can't be deemed worthless until after reasonable collections effort has occurred - 2010 is 100% NOT the right answer here.

My question is how far from 2010 can a bad debt be deemed worthless and is there a limitation? 10 years? 20?

[DaveF1006]

I am sending you this IRS link that specifically addresses bad debt deductions. It does not specifically mention a time limit but this is what they state in the link, "A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt." So if you decide to report it this year. Here is how i would suggest to report it:

1. Go to federal>income and expenses>investment income>Stocks, Mutual Funds, Bonds, Other (1099B)
2. First question asked, who brokered the deal, leave this blank
3. Then it will ask what kind of investment did you sell, indicate other
4. How did you receive it, indicate something else
5. Now it will ask for the description,  enter the name of the debtor and “bad debt statement attached
6. it will ask the date the agreement was made
7. next it will ask the date that you disposed of the bad debt (the date you stated that it became worthless)
8. For proceeds, indicate "0" For basis, put in the amount of the original loan amount
9. Now you will have a 8949 listing this in your return as a loss.  You can only be able to deduct $3000 as a capital loss so if your loss is more than that, you will be able to carryover that capital loss in future years until you recoup the full amount of the loss.

Now here is the kicker. For each bad debt, attach a statement to your return that contains:

• 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. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt."

This means that you need to print and mail your return this year, attaching a written statement that references the information required above. i hope this is thorough enough. 

[Boyan]

Cool, thank you! I sucks that one can not file electronically when bad debt is reported. It's been easily a decade since I have filed by paper so maybe it is time to renew that skill 🙂

The $3k limit and the need to carry over for future years is a good point, I am below that watermark so it doesn't affect me but it could affect others here on the forum so excellent point. A large worthless debt could take years to completely dispose of in the form of batches of $3k write off per year.

Thank you

[emjf21]

DaveF - my bad debt, claimed on my 2020 taxes was over $3000.  Do I just continue to enter, year after year, until I zero out?

[ThomasM125]

The bad debt loss is treated as a capital loss and is allowed against capital gains and up to $3,000 in the current year. If you have an unused loss from the previous year, TurboTax should automatically carryforward the loss from the previous year and apply it properly on your tax return in the current year.

You will see your allowable capital loss included with the gain or loss listed on line 7 of form 1040.

You can view your form 1040 while working in the online version of TurboTax by following these steps:

While working on your return in the Federal section of TurboTax:

   1.  Choose the Tax Tools icon on your left menu bar

   2.  Tools

   3.  View Tax Summary

   4.  Choose the Preview my 1040 on your left menu bar

@emjf21

[Boyan]

@emjf21 How did it go last year? Did you file by paper and after the first $3k was deducted in 2021 you're taking care of the balance this year, correct? Thanks