If a non-business bad debt becomes totally worthless, claim it as a short-term capital loss to in Part I of Schedule D. Attach a statement describing the loan, your relationship to the debtor, how you tried to collect it, and why you decided it was worthless.

Specific Details

The taxpayers reduced their taxable income by $3,000 by deducting a non-business bad debt. Since the taxpayers income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $900 ($3,000 x 30%).

Potential Savings

If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by deducting a non-business bad debt.