It is bad enough to be scammed, but to have to pay income taxes on money you have been scammed out of certainly adds insult to injury.  Prior to 2017 if a scammer convinced you to take money out of your retirement accounts and send the funds to the scammer, you could get a theft and loss deduction to ease the sting just a bit.  However, with the passage of the Tax Cuts and Jobs Act in 2017, the rules were changed such that you can only take a deduction under Internal Revenue Code Section 165 for your scam losses if the transaction was entered into for a profit such as when you are a victim of an investment scam.  However, for imposter scams, romance scams, tech support scams and more, you are not able to deduct your losses and if you took the money out of your retirement account to pay the scammer, the results are even worse because the full amount of your withdrawal unless it was from a tax-free Roth IRA will be fully subject to income tax and if you are under the age of 59 1/2 the IRS makes it worse by adding its standard early withdrawal penalty.

TIPS

Obviously taking the steps to avoid being scammed in the first place is your first line of defense.  In every Scam of the day we provide tips to avoid the particular Scam of the day.

In regard to the punitive tax laws that penalize scam victims with income taxes on funds they have unfairly lost to scammers The Tax Relief for Victims of Crimes, Scams and Disasters Act, a bipartisan bill was introduced in both the House of Representatives and the Senate as House bill HR 6938 and Senate bill S 3976 in 2024. The bills were sponsored by Democratic Representative Jamie Raskin of Maryland and Democratic Senator Tammy Baldwin of Wisconsin as well as Republican Representative Greg Steube of Florida and Republican Senator Peter Welch of Vermont.  The bill would not only have reinstated the theft loss deduction for all scam loss victims, but would have retroactively so that scam victims would be able to amend their previous returns and get back the extra income taxes they paid due to the 2017 law changes.   Unfortunately, both bills died in Committee.  However, representatives Steube and Raskin have filed a new similar bill designated as HR 3469 which has been referred to the House Ways and Means Committee.  I urge everyone to contact your representatives to urge them to pass this much needed law.

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