I would suggest that you study IRS Publication 550 page 57.
<a rel="nofollow" target="_blank" href="
https://www.irs.gov/pub/irs-pdf/p550.pdf">https://www.irs.gov/pub/irs-pdf/p550.pdf</a>
The IRS is VERY likely to deny a bad debt for a loan made to your children. It depends on the circumstances, if the children were adults, if there was a contract with a set amount of interest to be paid, what steps were taken to collect, if the children have filed for bankruptcy, etc.
Not saying that is is not a real bad debt, but do not be surprised if the IRS makes you jump through hoops to prove it. The IRS scrutinizes bad debts made to family members very closely because that if a red flag for fraud - gifts are not deductible so a gift is disguised as a loan in order to deduct it as a bad debt - very high IRS audit red flag.
Quote from Pub 550
"Loan or gift. For a bad debt, you must
show there was an intention at the time of the
transaction to make a loan and not a gift. If you
lend money to a relative or friend with the understanding
that it may not be repaid, it is considered
a gift and not a loan. You cannot take a
bad debt deduction for a gift. There cannot be a
bad debt unless there is a true creditor-debtor
relationship between you and the person or organization
that owes you the money.
When minor children borrow from their parents
to pay for their basic needs, there is no
genuine debt. A bad debt cannot be deducted
for such a loan"
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
