Monty loaned his friend Ned $14,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $12,600, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $12,600 as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $5,040 and taxable income of $49,000. During the current year, Ned paid Monty $11,340 in satisfaction of the debt.
Determine Monty's tax treatment for the $11,340 received in the current year.
The nonbusiness bad debt of $12,600 would have been reported as a short-term capital loss , and $___________ would be included in Monty's gross income.
**Explain and show work**
The non-business bad debt of $12,600 would have been reported as a short term capital loss,and $ 8040 would be included in Monty's gross income
Explanation:
Monty must include upto $11,340 in gross income but only to the extent of a tax benefit the prior year. because the debt is a non-business bad debt,the $12,600 would have been reported as a short term capital loss.last year Monty had $5040 capital gains and taxable income of $49,000. therefore $ 8040($5040 capital gain +3000 over all limit) of the $12,600 loss produced a tax benefit.hence ,only $8040 would be included in Monty's gross income this year
Get Answers For Free
Most questions answered within 1 hours.