Amounts you pay to fulfill a small claims judgement are not deductible on your tax return. However, the associated legal fees may be deductible. If you were awarded a small court claims judgment and you never received it, you can write off the balance as a bad debt.
Legal Expenses
In general, judgements levied on you through a small claims court case are not deductible expenses on your tax return. However, any attorney or legal fees you pay may be deductible. The IRS allows you to deduct legal fees if you paid the fees in an attempt to produce or collect taxable income, keep your job, for divorce advice or to collect taxable alimony.
Deducting Legal Expenses
Qualifying legal expenses are deductible on Schedule A as "other expenses." List qualifying legal expenses on line 23, along with any amounts paid for investments and safe deposit boxes. Miscellaneous deductions like legal expenses are only deductible to the extent that they exceed 2 percent of your adjusted gross income. In order to claim the deduction, you must itemize deductions and forgo the standard deduction.
Unpaid Judgments
If you were owed a judgement through small claims court and you never received it, you may deduct it as a bad debt. This is only necessary if you were suing to recover an asset or amount previously paid to the debtor and you never received the proceeds from the judgement. In order to write off the bad debt, you must have taken reasonable steps to collect the amount owed.
Writing Off the Bad Debt
Bad debts can be written off as a short term capital loss capital loss on Form 8949. Record the name of the person who owed you the debt and the phrase "bad debt statement attached" in line one. For your basis in the bad debt, write the amount that you lent out or the value of the asset that was taken. Under proceeds, write zero. In the attached statement, detail the nature of the debt and explain that you never received the small claims judgement owed to you.
