Question

Gina loaned Tom $50,000. Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance. In 2018, when the balance owing on the loan was $18,000, Tom defaulted on the note. As of the end of 2018, there appeared to be no reasonable prospect of Gina recovering the $18,000. As a consequence, Gina claimed the $18,000 as a nonbusiness bad debt. In 2018, Gina had AGI of $50,000, which included $16,000 of net long-term capital gains. Gina did not itemize her deductions. In 2019, Tom paid Gina $13,000 in final settlement of the loan. How should Gina account for the payment in 2019

Answer 1

Answer:

Gina must report the $13,000 as income for the current year.

Explanation:

According to the tax benefit rule, any recovered expense ($13,000) must be included as income in the extent at which it resulted in a tax benefit.

Since Gina had a net $16,000 long term capital gains that were offset by her $18,000 loss, the $13,000 will partially replace most of the capital gains that were reduced the previous year.