Can You Deduct Garnishments From Your Income Taxes?

When a creditor attempts to forcibly extract payment from a debtor, he may garnish the individual's wages. When a person's wages are garnished, it means that his employer or another provider of income with siphon off a portion of the money and provide it the creditor until he is repaid. While the debtor cannot deduct garnishments from his income taxes, the creditor may be able to write its cost off as a business expense.

Garnishment

Wages are garnished after a debtor has lost a civil lawsuit brought by the creditor. Creditors will generally sue debtors for breaching the loan contract and attempt to collect damages equivalent to the size of the debt plus any additional fees, such as legal fees. The amount garnished counts, in the eyes of the IRS, as a delayed payment of a debt.

Debtor Deduction

Debtors cannot deduct a garnishment from their income taxes. There are many expenses that can be deducted from an individual's income taxes, but the garnishment of income taxes is not one of them. In addition, an individual will still be required to pay taxes on the money paid to him that is garnished from his wages. He will still have to pay income tax on it, as well as Social Security taxes and state taxes.

Creditor Deduction

If a creditor resorts to a garnishment to collect on an unpaid debt, he may be able to write off the costs of the garnishment as a business expense. The federal government, as well as many state and local governments, recognize business expenses a valid deduction. In most cases, the cost of securing payment for money owed to an individual's business, such as a garnishment, clearly meets this definition.

Considerations

If the creditor is not able to successfully garnish the money, he may be able to write the lost money off on his taxes as well. If businesses are unable to collect on debts, this money can be also be deducted from their income taxes as a business expense. However, any recovered funds cannot be written off. If funds are recovered after being written off, the deductions must be returned.