My daughter in law was badly injured in an auto accident. The other driver was entirely at fault, but has minimal insurance and no assets. So she can probably win a substantial damage award, but can't collect much of anything.
Is there a tax benefit to that? Damages aren't taxable, so it really amounts to an noncollectable debt, which is deductible. If so, would it be a single year (which would be nearly useless) or roll over until used up?
thanks
Not all bad debts are deductible. The following is from IRS Publication 17.
"To deduct a bad debt, you must have a basis in it - that is, you must have already included the amount in your income or loaned out your cash. For example, you can't claim a bad debt deduction for court-ordered child support not paid to you by your former spouse."
(This is under "Nonbusiness Bad Debts," page 108 of the 2018 edition.)
It seems to me that an uncollectible judgment for damages would be similar to court-ordered child support. Your daughter has not reported the damage award as income or loaned out her own money. I don't think she would be able to deduct the unpaid judgment.
Bob Sandler
This isn't an answer to your question, but didn't she have under- insured motorists coverage?
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