Bad Debts
Response to the following problem:
Rita loaned her brother, Richard, $7,500 on February 14, 2013. The loan represents a bona fide loan. Richard filed for bankruptcy in 2014, and Rita learned that she could expect to receive only $.70 on the dollar on the personal loan that she had made to him. On May 17, 2015, Rita received a final settlement of $4,000.
a. How much loss can Rita deduct in 2014?
b. How much loss can Rita deduct in 2015?
c. How will this loss be treated on Rita's tax return?