If you have ever made a loan to your spouse’s family member with no chance in sight of getting your money back, you may be able to get Uncle Same to help you out.
A nonbusiness bad debt can be deducted up to $3,000 per year with a lifetime total of $10,000. The debt must be for an actual loan, not a gift, and must be considered completely worthless. This means that there cannot be any chance that you are going to get your money back.
Of course, in order to take the deduction, you will need to prove all of these elements, and a written loan document will go a long way in satisfying your requirements with the IRS. However, if you do ever get paid back after taking the deduction, you have to report that income on your tax return for the year in which you received it.