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Anne
Anne, Master Tax Preparer
Category: Tax
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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I reside in Texas. Im aware that the limitations to write

Customer Question

I reside in Texas. I'm aware that the limitations to write off charity is 30% of adjust gross income. If I want to donate $ to an individual and not a charity organization, can I still write this off of my taxes?
Submitted: 4 years ago.
Category: Tax
Expert:  Anne replied 4 years ago.
HiCustomerbr />
I'm afraid the answer to your question is no. In order for you to deduct any contribution, it must be made to a Qualifed Charity, generally a 501(c)(3). Individuals are absolutely not recognized as meeting the standard for being tax deductible. Please see below (you will need to copy and paste this link into your web browser) and please see question/answer #3.

http://nonprofit.about.com/od/fordonors/tp/taxdeductionsforcharity.htm

Although I wish I could have given you the answer I'm sure you were hoping for, I hope this at least gives you some clarity and I hope this information helps.
Customer: replied 4 years ago.
So to bypass this, if I gave the church the $ and they in turned gave it to this person would that make a difference in deduction?<br /><br />Also, companies/business can write off bad debt if someone doesn't pay them. Is there something like this for an individual if someone doesn't pay a loan?<br /><br />Just figuring out my options!
Expert:  Anne replied 4 years ago.
Unfortunately, there is no way to deduct any charitable contribution that you ear mark to go to a specific individual. Please see below:

Contributions to Individuals
Customer: replied 4 years ago.
Wow! Pretty much if I give this $ to a person as a loan etc, if they don't pay it back its all gone then. I thought at least I could get it back as a contribution of a donation.

Do you know of any foundation that could help this person then? Due to him flying to the UK for a business trip with his child, he had a car wreck and was taken to a private hospital in London. During this time, his daughter has died due to lack of blood availability after surgery. After this tragedy, the hospital is asking for a deposit to pay for her to stay in he mourg there until she is shipped back to the USA when he is able to get back. Due to this wreck, his credit card and identification was stolen. He is in the process of getting his credit card back which was a long process because he has no identification available. The hospital will not preserve the body even though they know he is getting his credit card to make full payment of medical bills incurred.

If you can't answer me this questions bc of wrong categorizing, could u send it to the right one then.

Thanks for the info so far!
Expert:  Anne replied 4 years ago.
If you gave this as a loan, and you can establish that it is in fact a loan with full expectation that it be paid back, and the person defaults on the loan, you can take this as a bad debt limited to $3000/year on Schedule D. Please see below:

Tax Topics - Topic 453 Bad Debt Deduction

You do not have to take this person to court to sue them in order to make this a bad debt. You would have to be able to prove that this was a loan and not a gift, so it would be helpful if you have something in writing stating the expectation that this was a loan and was to be paid back.

Does this help you?
Customer: replied 4 years ago.
This is awesome. I never knew this.

If so, I could have written bad debt a long time ago. Now that you mentioned this, am I able to get past bad debt loans written off if I proof that it was loan. These are old like before in 1994 or 1995 and before 2003 and one on 2009? I already filed my taxes for 2009 so its too late to put the one from 2009 on there. the 2009 they signed a legal document plus emails stating that they will pay with interest. Can the interest be written off too or just the principle?
Expert:  Anne replied 4 years ago.
You can only amend a tax return and receive a refund for 3 years from the date it was due (April 15) so only 2007, 2008, & 2009 are still open years. 2006 closed April 15, 2010, since it would have been due April 15, 2007.

However, you may have SOME leeway for when the debt is declared worthless. Probably 1994 & 1995 are lost (unless you have some way of showing the debt was still open, such as a signed paper stating terms, and you have proof you were still trying to collect). 2003 may also be lost for the same reason.

You may certainly amend 2009 and include both interest and principle as long as the interest was clearly stated. IRS does not believe in interest free loans, so even if you had had payment, you would have to have counted some of the payment as interest. If you hadn't, IRS would have "imputed" interest equal to the current rate at the time of the loan (For many years this hung around 6%. If you want to know what you should have been charging, you will need to look up the APR at the time you made the loans. Here is a link to IRS APR rates: (you will need to copy & paste this into your web browser)

http://www.irs.ustreas.gov/app/picklist/list/federalRates.html

I hope this helps.
Customer: replied 4 years ago.
This is great information. Thanks!

So, if I write these bad debts, how does that affect taxes?
Expert:  Anne replied 4 years ago.
You're welcome!

The $3000/year you are allowed as a capital loss (any remaining bad debt in excess of the $3000/year is carried over to future years) is netted against your other income and lowers your AGI by $3000. This is a $ for $ write off.
Customer: replied 4 years ago.
Do I file for all 2009 and 2010 bad debt loans and let the IRS decide when or what yrs it should be carried over future years?
Expert:  Anne replied 4 years ago.
No, you enter the full amount of the loss on Part I Schedule D (short term losses) and it is limited to the $3000 on page 2 of the Schedule D. If you don't enter the full amount, IRS won't accept the carry over.

Please remember, as per the first link I sent you, Tax Topics - Topic 453 Bad Debt Deduction, you must include a statement:

The following is from
Publication 550 (2009), Investment Income and Expenses

On Schedule D, Part I, line 1, enter the name of the debtor and “statement attached” in column (a). Enter the amount of the bad debt in parentheses in column (f). Use a separate line for each bad debt. 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.

This is, to some extent, subjective as to when you decide the loan is worthless. However, I would not go back to 1994 or 1995, since this is so far past the open time frame. Even 2003 is questionable. You are a business woman, so you understand that the IRS will look at this from a business stand point. You would not wait 15 years for a loan to be paid, and they will not allow a non business bad debt that old, UNLESS there is convincing evidence that that was the original terms, but even that would be a gamble.

I hope this helps.


Customer: replied 4 years ago.
This is great information. I appreciate it. Your are giving me info I can't find online.

I created a legal document. I know the person's full name has to be on there. Does their address too for it to be legal? What other personal info ab this person needs to be put on this doc?
Expert:  Anne replied 4 years ago.
I would follow the outline above as closely as possible. I learned a long time ago not to give the IRS more than what they ask for, and that outline was taken from their pub. At MOST, I would give city/state of address. If they want more, they'll let you know.

Stick to the outline and you should be fine.
Customer: replied 4 years ago.
Ok!
Expert:  Anne replied 4 years ago.
Glad to have helped.Please remember to hit the accept button if you have found my answer helpful.

Thank you and best of luck to your friend.

Edited by Anne on 7/5/2010 at 10:26 PM EST
Customer: replied 4 years ago.
I don't know which link has that the IRS only needs the borrower's city and state only. Can u send that to me again?
Expert:  Anne replied 4 years ago.
Its not in the link. That was my suggestion when you mentioned something about putting in their address, and I said I would include city/state at most. Its not a requirement. Here's the outline I gave you:
  • 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.

They ask only for the name. When I do these for my customer, since so many people have such common names, if the debtor has one of those common names (like XXXXX XXXXX for example) I then include city/state. If the name is XXXXX XXXXX I don't include any portion of the address.
Customer: replied 4 years ago.
that makes sense. I have only one more question. The part of the name of the debtor. It states business or family member. Is this only way to write off bad loan debt? What happens if its neither a business or family member?
Expert:  Anne replied 4 years ago.
. There are special rules for family members, so that's why that question is there. You simply write "no relation/non business", and that takes it out of those special family situations, and it becomes a personal bad debt.

Edited by Anne on 7/5/2010 at 10:37 PM EST
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1923
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Anne and 3 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Thanks for info!
Customer: replied 4 years ago.
I was told by a friend of mine who is a cpa, that the older loans I did wo legal doc hast to be waited for 5 yrs bf writing them off. Is this true? Is a copy of the check that I gave writing in memo area loan good enough to show proof? 3 of the loans I have legal docs plus emails showing proof.
Expert:  Anne replied 4 years ago.
I have never found good hard proof of how long you must wait until you can deem the debt as being uncollectible, (and over the years I've looked) however, according to IRS's own pub, IRS does not require you to take the debtor to court, only to document your efforts to collect and to list the reason why you feel it is now uncollectible,and they themselves mention no time limit, I'm inclined to ask your CPA friend where he found the 5 year limit. (and if its really out there, please send me the link )

I've always thought there should be some sort of time limit, but I've never been able to find one.
Customer: replied 4 years ago.
She said the 5 yr is for the old debt that you don't have prove of. I will surely find out prove of this. The other ones are covered by the legal docs I have. There are only 2 that I don't have legal docs but I do have cashed checks that state loan on the memo. Will that be proof enough? Neither of them will admit they owe me the $. Even one had the never to call me to threaten me about it too. The other one is just ignoring my notices. These 2 owe me $1500 each wo interest incurred.
Expert:  Anne replied 4 years ago.
Again, I've never found a time limit on bad debts. However, in the information I previously linked you to from the IRS Pub 550, it states:

"A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money."

This does not in any way imply that you can write off any debt without documentation, regardless of how old it is. IRS can, and often does, ask for proof for any deduction on your tax return.

So the loans that have paperwork stating a repayment expectation on the surface seem to fit the criteria better than a check that just has "loan" written on the memo line. Without paperwork to back anything up, IRS has no way of knowing if that memo line was filled in when you wrote the check or not, or if there were any terms set up to repay the loan.

My professional opinion here is that you may certainly amend back to 3 years (2007, 2008, & 2009 ) and amend any return that the debt/loan became uncollectible in. However, you must be ready to supply the proof that this was a loan, and that you had on going attempts to collect the debt/loan in the manner set up in the original loan documents, and why you feel that this loan is no longer collectible should the IRS ask you for it.

Remember, the information you provide as a statement supporting your personal bad debt loss (listed below)
  • 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.

are minimum requirements. The IRS does not ask for a copy of the repayment schedule signed by both you and the debtor to be filed with the return, but they most certainly can ask for that, and if they do, and you don't have that, then they may disallow the loss.

To some extent, this may come down to how strong you feel your documents of proof are. If you think you have enough to prove that these were loans and not gifts, and that you tried all you could to collect them, then file for the personal bad debt deduction.

I hope this helps give you a clearer picture.
Customer: replied 4 years ago.
Not only do I have the cashed check but the bank will have a copy of it when the check was cashed not after the fact & I w have a copy of it past bank statement. What about that?

I know I'm covered w the recent loans bc I have signature w legal document so I'm not worried ab those.
Expert:  Anne replied 4 years ago.
Unfortunately, this will be up to the individual auditor should IRS request proof. The best rule of thumb I can tell you is the more proof you have, the better, so if you can still get them to sign anything re: loan terms, that would strengthen your claim.

If they won't sign anything, then it is what it is, and should IRS question your deduction, it would be up to the auditor as to what they will accept. There is always an appeals process that they notify you of if the auditor disallows the claim.
Customer: replied 4 years ago.
They don't even want to pay. So, they won't sign anything for them to be liable. They are moochers to me. They want a hand out wo responsibilities.
Expert:  Anne replied 4 years ago.
Then it is what it is, and in an IRS audit, you may very well lose the deduction, so whether or not you want to try it is up to you.
Expert:  Anne replied 4 years ago.
Although I have given you absolutely all of the information re: bad debts that I know (and you have certainly put me thru my paces here with your follow up questions) I did want to correct some inaccurate information that another expert caught and let me know about.

You may amend your return to claim a bad debt for up to 7 years, not 3 as I originally stated. This quote comes from IRS pub 550

Filing a claim for refund. If you do not deduct a bad debt on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the bad debt. To do this, use Form 1040X to amend your return for the year the debt became worthless. You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. (Claims not due to bad debts or worthless securities generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later.) For more information about filing a claim, see Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund.

You now know more about bad debts than probably most people on the planet lol, and like most experts here I want to give you the best information possible, so I think the other expert, and I have now corrected that previous information I gave you.

Again, I wish all the best to your friend.
Customer: replied 4 years ago.
Thanks for accepting my correction because some people get offended by that.

Is it 7 yrs from when the loan accured or was due?

I'm a business woman. I do have to know my information before stepping into anything. I don't like to be ignorant. Due to this, some people get offended by it. But, they shouldn't.
Expert:  Anne replied 4 years ago.
I'm rarely offended. My only goal is to give you the most correct information I can.

This would be 7 years from the date the debt became worthless, meaning that the person found out the debtor declared bankruptcy in a prior year making their loan now worthless in the year the debtor filed bankruptcy, or what ever circumstances the debt became worthless in that prior year.

I hope this helps.
Customer: replied 4 years ago.
When is the bad debt loan considered worthless than? You said bankruptcy but what else. These two ppl just don't want to pay that is the botXXXXX XXXXXne. One is married and they both have good jobs. One is single with 2 kids but gets $ for them every month plus makes good $ too with her job.
Expert:  Anne replied 4 years ago.
Again, this is more or less a subjective call. The only directive information the IRS supplies for this is either bankruptcy, or "legal action to collect would probably not result in payment of any part of the debt."

I think I would hang my hat on the legal action not likely to result in payment, but remember to have everything documented, especially the steps you took to try to collect the debt before you finally decided it was a lost cause.
Customer: replied 4 years ago.
That is the one that would be my option for those 2 late ones that occured before 2003. Believe me, I document everything. I know the 2 late ones are a lost cause for sure. They have no intentions of paying me back in their words exactly. Each were $1500 loans to pay back. I got every excuse in the book. I even was letting them pay me monthly what they could. They didn't even want to pay me $5 a month.
Expert:  Anne replied 4 years ago.
Sounds like you've got this under control now then.
Customer: replied 4 years ago.
Thanks to you! I never knew about this deduction.

I'm working with customer service on this site to figure out why the bonus doesn't show up on here. It's not just this posting, its all. As soon as that is resolved, I will provide you a bonus.
Expert:  Anne replied 4 years ago.
The bonus shows in my earnings. Thank you very much!!. Glad I could help.

Edited by Anne on 7/8/2010 at 11:03 PM EST

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Anne
Anne
Master Tax Preparer
1904 Satisfied Customers
Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses