Question

In 2017, Gillian personally loaned Matt $25,000. In 2018, Matt defaulted on the loan when the remaining balance outstanding was $15,000. Since Matt’s whereabouts were unknown, there was no reasonable prospect of Gillian recovering the $15,000. Gillian claimed the $15,000 as a nonbusiness bad debt in 2018. Her AGI in 2018 was $50,000 which also included a short-term capital gain of $14,000.  In 2019, Matt paid Gillian $5,000 in final settlement of the loan. In 2019, Gillian should:

Amend her 2018 tax return only claiming a $10,000 nonbusiness bad debt
	b.	Amend her 2018 tax return since the nonbusiness bad debt is not deductible until 2019
	c.	Report no income or deduction from the nonbusiness bad debt in 2019
	d.	Report $1,000 of income for 2019
	e.	Report $5,000 of income for 2019

Answer 1

Ans:

Recovery of Non business Bad debts to be reported as income in the period of recovery. However income to be reported to the extent of non business bad debts deducted in earlier years.

Reported Non business bad debts were $15,000. Since AGI for 2018 was more than $15,000, whole amount is deductible in 2018.

So on recovery of $5,000 from Matt. Additinal income of $5,000 to be reported.

Correct answer is Option E.

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