Federal tax deduction for unpaid judgement

[Karun]

I have an unpaid small claims judgment from 1999. I sued the partners from auto repair shop for telling me they were going to do replace my engine but instead stripping and selling off parts from my car - then going out of business with my car in shambles. The court awarded me a judgment in the amount it cost to repair my vehicle...With the exception of $20 paid at the Judgment Debtors exam (to show good faith) the debt remains unpaid and the partners have gone transient (most likely back to Mexico). I am coming up on the 10 year, anniversary and need to figure out if I should extend or write-off. This is a big tax year so the write-off could be helpful. Can I write it off? As a bad-debt? or loss? Also since the debt accrues 10% simple interest per year, can I include the interest amount in the write-off.

I may have to visit the accountant but would prefer to manage this myself if I can get some straight forward advice. Thanks.

 

[LdiJ]

I have an unpaid small claims judgment from 1999. I sued the partners from auto repair shop for telling me they were going to do replace my engine but instead stripping and selling off parts from my car - then going out of business with my car in shambles. The court awarded me a judgment in the amount it cost to repair my vehicle...With the exception of $20 paid at the Judgment Debtors exam (to show good faith) the debt remains unpaid and the partners have gone transient (most likely back to Mexico). I am coming up on the 10 year, anniversary and need to figure out if I should extend or write-off. This is a big tax year so the write-off could be helpful. Can I write it off? As a bad-debt? or loss? Also since the debt accrues 10% simple interest per year, can I include the interest amount in the write-off.

I may have to visit the accountant but would prefer to manage this myself if I can get some straight forward advice. Thanks.

I think that you could treat it as a casualty loss, but I would definitely get a consult with a local tax professional.

 

[tranquility]

Good thought on a casualty loss LdiJ, we could claim the loss only occurred once the judgment went bad. However, this was a small claims case. If the OP really has a "big tax year" this year, when we limit the deduction by 10% of the AGI, I suspect it wouldn't be worth much if anything.

As to the other question, OP, the interest is not a "bad debt" as you never took it in as income.

Sorry, while there are possibilities, I bet there really isn't a probability of any deduction.

 

[mtpockets]

nonbusiness bad debt

The interest on the judgment cannot be written off because it was never taken into income. However, I don't think OP has to declare the judgment as income before taking a deduction because it sounds like the judgment was intended to reimburse OP for an economic loss.

Nonbusiness bad debts are deductible as short-term capital losses.

 

[LdiJ]

The interest on the judgment cannot be written off because it was never taken into income. However, I don't think OP has to declare the judgment as income before taking a deduction because it sounds like the judgment was intended to reimburse OP for an economic loss.

Hence, casualty loss...with the issues that tranq raised.

Nonbusiness bad debts are deductible as short-term capital losses.[/QUOTE]

Since when? I can conceed that some non business bad debts might legitimately be capital losses, in very specific circumstances, but I don't see how any tax professional could make the statement that all non-business bad debts are capital losses. I also don't remotely see how a tax professional could deem that the OP's situation is a capital loss as far as the judgement is concerned.

Again, I would urge the OP to consult a local tax professional.