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I have a promissory note that my attorney made for me

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I have a promissory...

I have a promissory note that my attorney made for me because I've had to loan my sister approximately 20,000 to help her in court and for her child support due to her ex husband taking her to court and asking that he be given full custody of the kids. He lost but during the few months they were in and out of court I had to loan her the money for attorney and court fees so my sister sign a promissory note and it's looking as if she will NEVER be able to pay me back. What do I do as far as taxes go? will that $20,000.00 or so that i loaned her help me on my taxes?

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I'm an independent contractor and I'm working as an investment adviser.

Submitted: 8 months ago.Category: Tax
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9/13/2017
Tax Professional: emc011075, Tax adviser replied 8 months ago
emc011075
emc011075, Tax adviser
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Satisfied Customers: 3,698
Experience: IRS licensed Enrolled Agent and tax instructor
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Hi. My name is ***** ***** I will be happy to help you.

Yes, you can deduct it as nonbusiness bad debt, up to 3K per year for the next few years. It is not a credit so do not expect 3k refund but depending on your tax bracket you can recoup between 10 - 40%.

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Customer reply replied 8 months ago
What exactly do you mean when you say "recoup"?
Tax Professional: emc011075, Tax adviser replied 8 months ago

It means that you will not get the entire 20K back. A $3,000 deduction will increase your refund (or reduce your taxes) by $300 - $1200 depending on your tax bracket. In 10% a 3K deduction will increase your taxes by $300. In the highest 40% tax bracket, a 3k deduction will increase your refund by $1,200.

Most people are in 10 - 25% tax bracket.

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Customer reply replied 8 months ago
are you saying that it isn't possible and there's no possible way for me to get the full amount back from her even if she signed a promissory note and it states that it's contingent that if she doesn't pay me back the amount I loaned her, there will be a lien on her home she has up for sale currently and I will be the first collector to receive my proceeds (which is the attorney fees and bills I've been paying for her for months & months). Even though the note states that her home is mine if she doesn't pay, does that not make a difference in what I'll receive from the IRS? Will I still only receive the LOW dollar amount of $3,000.00?
Tax Professional: emc011075, Tax adviser replied 8 months ago

The IRS does not interfere with legal disputes. A nonbusiness bad debt can be deducted the way as investment loss, up to 3K per year and you can carryforward the remaining balance to the future years, meaning, next year you can deduct again up to 3k. For tax purposes it does not make any difference where the debt originated or who can or cannot pay. This is a case for an family lawyer.

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Customer reply replied 8 months ago
I AM IN THE 33% TAX BRACKET. SO HOW MUCH DOES THAT MEAN WILL BE DEDUCTED FROM WHAT I OWE THE IRS? I ALREADY OWE THEM APPROXIMATELY 70,000 FOR MY 2017 TAXES BECAUSE I DIDN'T ENOUGH ON MY 2017 QUARTERLY ESTIMATED TAX VOUCHERS. MY ACCOUNTANT MISCALCULATED IT...
Tax Professional: emc011075, Tax adviser replied 8 months ago

Approximately $990, depending if you have other investment losses and or gains.

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Customer reply replied 8 months ago
What do you mean when you say "approximately $990?"
Tax Professional: emc011075, Tax adviser replied 8 months ago

Without preparing your tax return I cannot give you an exact number. If you have other capital losses for instance or most of your income comes from investment, the refund my be different as if most of your income is from job or self-employment and you have no capital investment. The 3K will reduce your AGI and consequently reduce other deduction that are subject to AGI limits. I have no way of knowing.

An finally there's the AMT - alternative minimum tax. I do not know if the deduction will not be eliminated by AMT.

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Tax Professional: emc011075, Tax adviser replied 8 months ago

Idealy, 3K deduction in 33% tax bracket would generate additional refund of $990. But we do not live in an ideal world and taxes are not always fair.

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Customer reply replied 8 months ago
What does "alternative minimum tax" mean exactly? ��
Tax Professional: emc011075, Tax adviser replied 8 months ago

If you have more questions I am going to opt out. I answered your original question and need to go to work now.

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Customer reply replied 8 months ago
Ok. Thank you for your help.
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