@kittm001 wrote:
My sister has a similar situation. But in her case the tour operator went bankrupt. She never recovered her $11k land tour trip expense. Is this deductible on her 2023 taxes?
Your sister may have a "non-business bad debt." This is a deductible capital loss, but the loss deduction is limited to her capital gains plus $3000. The remaining amount can be carried forward. If she has other capital gains (stocks or other investments) the non-business bad debt can offset the gains; if she has no investment gains, she can deduct $3000 of the loss and carry the rest forward.
A non-business bad debt must be totally worthless, not just potentially worthless. She must also take all reasonable steps to collect the debt before she can declare it worthless and deduct the loss. (In this case, she should probably notify the court overseeing the bankruptcy that she has a claim.) If she is a creditor in the bankruptcy, the loss is not totally worthless until the bankruptcy proceeding is closed. This can be inconvenient, if the tour operator declared bankruptcy in 2023, but the court proceeding is not closed until 2025, the loss would be declared on her 2025 tax return. (If she can get a letter from the court that she is so far down the list of creditors that there is no chance she will get any recovery, then she might be able to claim the loss on the basis of the letter. But if she later got a recovery, that would be taxable income since it would be a reimbursement of a previous deduction.) The date of the loss for the deduction is the date the debt becomes worthless, so if she paid in 2023 but the bankruptcy doesn't officially close until 2025, then the loss occurred in 2025 and is reported on the 2025 tax return, you don't go back and amend the prior return.
Read here for more.
https://www.irs.gov/taxtopics/tc453
https://turbotax.intuit.com/tax-tips/irs-tax-return/how-to-report-non-business-bad-debt-on-a-tax-ret...
The difference between this case and the person who is walking away from a prepaid vacation is that voluntarily giving up something of value does not create a tax deduction, even if there are good reasons to do so. When you have a contract with someone where you have paid them for a product or service and they refuse or are unable to fulfill the contract, you may have a bad debt.
Also, there is a very important difference between a bad debt and theft. If this was never a legitimate travel company and was a scam from the start, then this is theft. Congress removed the deduction for theft losses unless the loss occurred due to a declared federal disaster. If the owner of the travel company ends up getting prosecuted for stealing customer funds (instead of merely being an honest but failed business), then you may want to have the loss reviewed by a local tax professional to see if it still counts as a bad debt or theft.
