Personal bad debts are deductible as a short term capital loss on
Form 8949. They are difficult to support as bad debts instead of
non-deductible gifts, however, when they are made to friends and family
member. The IRS closely scrutinizes bad debts between friends and
family members to insure they are not disguised gifts.
From http://www.irs.gov/taxtopics/tc453.html
: For a bad debt, you must show that 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.
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The instructions in IRS' Publication 17 provide additional requirements for reporting a bad debt. They include:
"How to report bad debts. Deduct nonbusiness bad debts as short-term capital losses on Form 8949.
On Form 8949, line 1, enter the name of the debtor and “bad debt
statement attached” in column (a). Enter your basis in the bad debt in
column (f) and enter zero in column (e). Use a separate line for each
bad debt. "
Also -
"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."
Turbotax asks for this information.
Turbotax could
make entering a bad debt easier but, for the desktop version, the
sequence would be as listed below. (I assume it's similar for the
on-line version but I don't use it.)
To deduct a bad debt, go to the
wages and income tab, then choose "I'll choose what I want to work on"
(the "deduction" is under the income category as it is part of capital
gains or losses)
- From the next page under the Investment Income heading select Stocks, Mutual Funds, Bonds, Other
- In response to "Did you Sell Any Investments in 2013" select yes.
- On the next page, under Let Us Enter Your Investment Sale Info, check "I'll type it in myself".
- On the next page for "Select Your Financial Institution" select "No Financial Institution"
- On the next page, for the first item, check "Add More Details" for the first free item,
- On the next page select "Uncollectible Debt"
- The next page will show the data you need to enter for the debt.
