How to Forgive a Promissory Note

Forgiving a promissory note is as straightforward as destroying the document or returning it to the debtor. In court, a promissory note is a legal document that proves a debt, and without that document, there is generally no proof of the agreement. Although forgiving a debt is a selfless act, there are income tax benefits available to compensate you for your generosity. The Internal Revenue Service provides a bad-debt deduction to taxpayers who deem a debt worthless. The amount of your deduction is limited to the lesser of $1,500 if you are married, $3,000 if you are single or the amount of the debt.

Download Form 1040, Schedule D and Form 8949 from the Internal Revenue Service website.

Check "Box C" on the top of Part 1 on Form 8949.

Write "Bad Debt State Attached" in Line 1, Column A, Part I.

Write the amount that you forgave in Line 1, Column F, and enter "0" in Column D.

Write the amount of the forgiven debt in Line 1, Column H. Transfer the information from each column on Line 1 to Line 2.

Write the amount of the forgiven debt in Part I, Line 3, Column E on Schedule D. Write "0" in Column D.

Write the amount of the forgiven debt in Line 3, Column H, and again in Line 7.

Skip down to Line 16 and enter the amount of the forgiven debt.

Enter the smaller of these -- the amount of the forgiven debt or $1,500 if you are single or $3,000 if you are married -- on Line 21. Check "Yes" if you are claiming qualified dividends or "No" if you are not in Line 22.

Transfer the amount on Line 22 to Line 16 on Form 1040.

Write out a statement that describes the debt, including the date the debt became due and the amount of the debt. Include the name of the debtor and your relationship. Describe the efforts made to collect the debt and why you determined it is worthless. Attach the statement to the back of Form 8949.