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:

1. 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
2. Click Investment Income to expand the category, then click Gain or loss on the sale of investments to expand the category
3. Click Capital gain or loss (Form 1099-B)
4. Click Add to create a new copy of the form or click Review to review a form already created
5. Click Step-by-Step Guidance
6. 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
7. The program will proceed with the interview questions to enter any additional information required.

Related Links

• IRS Publication 550, Investment Income and Expenses
• Schedule D – Capital Gains and Losses
• Bad Debt – Business
• Short-Term and Long-Term Gain or Loss