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L got default judgement in 2016. l tried to collect the

judgment until now but l...
l got default judgement in 2016. l tried to collect the judgment until now but l couldn't. the judgement is over 375,000 dollars and the interest rate is adding up every day. Since l couldn't able to collect the judgement can l start claiming it on my tax return. the defendant has business and l invested. later l found out the business is nothing but fraud and l lost every money l spent on that fraud business. l am about to file tax return. so what should l tell my tax prepare person? thanks
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Answered in 6 minutes by:
3/6/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,692
Experience: Taxes, Immigration, Labor Relations
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If someone owes you money that you can't collect, you may have a bad debt.

Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash.

So the interest that you never included into your taxable income - may not be deducted as bad debt.

.

Generally, a business bad debt is a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless. A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. You can deduct it on Form 1040, Schedule C.pdf, Profit or Loss from Business (Sole Proprietorship), or on your applicable business income tax return.

.

Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.

A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt.

Report a nonbusiness bad debt as a short-term capital loss on Form 8949.pdf, Sales and Other Dispositions of Capital Assets, Part 1, 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).

A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. The statement must contain: 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.

Let me know if you need any help with reporting.

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Customer reply replied 1 month ago
the default judgement amount is 375,000 against three family member defendants. so far l tried to collect from one of the defendants who is willing to give me only 10,000 dollars. l went after his property but his attorney told me there is no enough equity to collect from the house. l did not try to collect the default judgement from the other two family member defendants who are still working for.1.So, how much money can l deduct from 2017 tax year.
2. one of the defendant who offered me 10,000 is already retired but the other two are still working. Can go after his retirement money? also for the two defendants can l go after their monthly salary. can garnish their salary regardless of how their salary is low?

Even the property doesn't have enough equity now - you still may register a lien - and they will have hard time to refinance or take any equity out in future - that will potentially protect your interest.

Potentially you may deduct as a bad debt - the full amount IF debt became worthless in 2017 and the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid.

You may NOT apply the judgement against retirement income - that is protected asset - sorry.

You may use the judgement to levy on wages and may levy on bank accounts.

Your state law protected those in low income from garnishment - but the level of protection vary between states.

But regardless - you may submit the judgement for collection to their employers - one way or another - that will affect debtors - and at some point they may be willing to negotiate.

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Lev
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Experience: Taxes, Immigration, Labor Relations
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