- 1). Determine if the judgment is deductible. The judgment must come from lost income and not anticipation of a payment for a service performed. For instance, if you loaned money to another person using your earned income, the judgment is deductible. On the other hand, a judgment for non-payment of a job you performed is not deductible because you never collected the income, which means you never paid tax on it.
- 2). Obtain a copy of the court judgment. You may request a copy by phoning or visiting the office of the court clerk and giving the clerk the case number. Alternately, you can give the clerk your full name and the defendant's name.
- 3). Complete IRS Form 1040. In Schedule D, Part 1 of Form 1040, you may deduct the judgment. If you receive partial payment of the judgment from the defendant, you must deduct that amount from the total amount of the judgment.
- 4). Write a brief statement of facts explaining that the debt is worthless. Summarize why the judgment was awarded and your unsuccessful attempts to collect it. The statement only needs to include the reason for the judgment and demonstrate that you have attempted in good faith to collect the award.
- 5). File your 1040 tax return and attach your statement with a copy of the judgment.
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