@BlueHeron wrote:
>Don't expect the borrower to declare anything on their tax return.
While I don't care for the sake of my own tax return, I am still curious
1) if they are required to report the shortfall of payment as income to themselves given that they are contractually off the hook due to the no-dependency clause?
and 2) if the answer to #1 is affected by whether I choose to take my non-business bad debt writeoff?
#1. Its not your problem, so it's not my problem to research it.
#2. No.
This is what the IRS says about reporting a bad debt.
How to report bad debts.
Deduct nonbusiness bad debts as short-term capital losses on Form 8949.
On Form 8949, Part I, 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 (e) and enter zero in column (d). Use a separate line for each bad debt.
Make sure you report your bad debt(s) (and any other short-term transactions for which you did not receive a Form 1099-B) on Form 8949 with box C checked..
For each bad debt, attach a statement to your return that contains:
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A description of the debt, including the amount, and the date it became due;
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The name of the debtor, and any business or family relationship between you and the debtor;
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The efforts you made to collect the debt; and
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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.
That written statement gives the IRS enough information to contact the borrower if they want to. Turbotax does not allow PDF attachments. I assume (I have not tested it) that Turbotax will give you some blank lines to type your responses to these questions. Or, you can file by mail (and not e-file), and attach your own written statement.
