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I have a question in preparation for next year's taxes. We had loaned FIL money years ago, some of which was able to be paid back. I do have a signed promissory note, and I have tracked interest and payments over the years, claiming the interest on my taxes in the years that payments were made.

FIL passed away, and so the remainder of the debt is no longer collectible because there are not enough assets in the estate. In fact, there are not enough assets to pay back Medicaid, so the estate is clearly bankrupt.

I am thinking that I should be able to deduct the balance of the debt when I file my 2014 taxes as a bad debt. In reading Topic 453 on the IRS website, I'm wondering what they mean by this phrase:

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.

What is a partially worthless bad debt, and does it affect me at all? Since there were some payments made, does that make this only partially worthless since it is only the balance that is unpaid? This is confusing me.

Also, I am thinking that the records I will need to keep for this will be the promissory note, the schedule of payments, the letter detailing the estate assets and liabilities, and the letter from Medicaid with their lien paperwork. Anything else that I'd need to keep?

I figure since we're doing all of this now, I'd prefer to make my notes and gather the paperwork together for next year so that I don't forget it and am not scrambling to find it.

Thanks for any help on clarifying this for me.
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