If I claim a bad debt, may I still pursue the debt and repay later?

I'm assuming that claiming a bad debt on my income taxes does not quit the claim of pursuance of the debt.

That is, I had a bad debt in 2005.

I hired lawyers who secured a positive judgment.

The debtor fled to FL, where apparently it is nearly impossible to collect a debt unless the debtor has other real property.

My lawyers stopped returning my annual calls and emails re: progress.

So this year I claimed it as a bad debt.

A few days ago, my lawyers sent an email asking for permission to pursue a subpoena re: she's popped up with her name on a truck.

Thanks for the advice.

Reply to
Hooliganz
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Yes, by taking the bad debt loss you did not give up your right to pursue the debt. But if you collect, you'll have to claim it as taxable income.

___ Stu

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Reply to
Stuart Bronstein

Thanks. I appreciate the advice.

Reply to
Hooliganz

A positive judgment of what -- that you had a debt, or that it was a bad debt.

According to publication 535 and tax topic 453

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A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless.

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I think lawyers not returning your emails is not definitive enough to conclude that the debt is worthless.

Maybe the correct thing to do here is to amend the prior year return to not claim the loss. If it was a personal loss you deducted it as a short term loss on Schedule D, and at most only $3,000 is deductible this year and the rest gets carried over to next year. I'm not clear on the years, but if you claimed the bad debt in 2005, then you may have to amend many years. There will be interest for each year -- that is interest from the time the return was filed to now. And there would be amended state and local returns too.

Alternatively, if you claimed a loss in prior years, you must claim a recovery. This is easier, and I doubt the IRS would ask questions.

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Recovery of a Bad Debt

If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. The amount you include is limited to the amount you actually deducted. However, you can exclude the amount deducted that did not reduce your tax. Report the recovery as ?Other income? on the appropriate business form or schedule.

See Recoveries in Publication 525 for more information.

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So if you claimed the loss on Schedule D, claim the gain on Schedule D. If you claimed the loss on Schedule C (for business losses) claim the gain on Schedule C.

Reply to
removeps-groups

Clearly he got a judgment against the person who owes the money.

That's good advice, and a better answer than I gave. It may well have been proper to determine the debt was not collectible in the earlier year, but it's really a judgment call.

___ Stu

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Reply to
Stuart A. Bronstein

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