“IF SOMEBODY OWE YOU LOOK HERE ! “
The IRS says that if you loan someone money with the clear expectation they’d pay you back — and they don’t — you may be able to write off that unpaid amount on your taxes.
This is considered a nonbusiness bad debt on your tax return.
What Form Do You File?
To claim a nonbusiness bad debt, you must complete Form 8949 and attach it to your personal tax return.
Along with Form 8949, you also need to include a written statement that explains:
How much money was owed to you and the original repayment date
The name of the person who borrowed the money and your relationship to them.
What you did to try to collect the debt, and why you’ve concluded you won’t be paid back.
Example:
Let’s say I loaned my mom $200 for groceries on November 1, 2023, and she promised to repay me on her November 15th paycheck.
When she didn’t pay me back, I followed up on November 30th. She brushed me off and basically made it clear that repayment wasn’t happening.
Because the debt is uncollectible, I could report the $200 as a bad debt on Form 8949 and attach a written statement describing exactly what happened when I file my taxes.
Reporting Bad Debts to the IRS:
Nobody wants to deal with unpaid personal loans, but the IRS does allow certain situations to be claimed as nonbusiness bad debt—as long as you can prove you never got paid and don’t expect to.
Just make sure you keep good documentation of the loan terms and your attempts to get the money back.
If you’ve ever lent money to someone and never got it back, you’re not alone—and luckily, the IRS provides a way to potentially recoup some of that loss through tax deductions. This is categorized as a nonbusiness bad debt when the loan is a personal, noncommercial debt with no expectation of repayment. To qualify, you must prove the debt is completely uncollectible. This means you tried to recover the money with reasonable efforts, such as follow-up calls, written requests, or documented attempts to collect the debt, but were ultimately unsuccessful. Keeping thorough records of these attempts and any communications is crucial not only for your own peace of mind, but also to provide credible evidence to the IRS. Form 8949 is the tax form you’ll use to report the bad debt. Alongside completing this form, you should prepare a written statement that includes key details: the amount owed, original repayment terms, the borrower's identity and your relationship with them, and your rationale for concluding the debt will not be repaid. For example, if you lent $200 to a family member with a clear repayment date, followed up when the deadline passed, and were formally or informally informed that repayment isn’t forthcoming, you can report that amount on your tax return as a bad debt. It’s important to note that these debts must be personal and nonbusiness related—loans related to your business follow different rules. Incorporating this deduction can offset other income, potentially reducing your overall tax liability. However, consulting a tax professional or using reliable tax software is recommended to ensure all IRS requirements are met. Remember, to claim a bad debt deduction, you must attach Form 8949 and your explanatory statement to your tax return, documenting everything accurately. This transparency not only facilitates a smoother audit process if one arises, but also ensures you take full advantage of allowable deductions. Understanding how nonbusiness bad debts work can alleviate some financial stress when loans go unpaid and can help you navigate tax season with confidence. Just be sure to maintain good documentation, meet IRS criteria, and file correctly to maximize your benefits.
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