The Tax Blotter is a periodic round-up of recent tax court rulings, legislative news, and other tax issues.
Along with casualty losses, deductions for personal theft losses remain suspended at least through the end of the year, although there are certain exceptions.
Steal back deductions. The Tax Cuts and Jobs Act (TCJA) generally suspends deductions for casualty and theft losses for 2018 through 2015 except for losses in federally-declared disaster areas. Prior to the TCJA, deductions were allowed for unreimbursed losses above $10% of adjusted gross income (AGI) after subtracting $100 per event. But note that the exception for damages caused by casualties like wildfires in designated disaster-areas extends to theft losses. For instance, if someone steals your car from a flooded street in a federal disaster area, you may deduct the value of the loss, subject to the usual limits.
IRS rules on profit motive. The TCJA suspension doesn’t apply to certain theft losses due to transactions “entered into for profit.” Now the IRS has provided more clarification of the rules. In a new memo, it spells out five specific scenarios involving financial scams. Deductions are approved for losses resulting from compromised financial accounts, “pig butchering scams” where early investment success leads to financial slaughter and phishing scams where victims are tricked into revealing login credentials. But no deductions are allowed for romance victims who volunteer to help someone they met online or ruses based on nonexistent kidnapping events.
Recover from Ponzi scheme. Finally, be aware that you can deduct investment losses incurred in Ponzi schemes if special requirements are met. A Ponzi scheme is a pyramid-type scam where past investors are paid by new investors. Back in 2009, Bernie Madoff was convicted for his role in a highly-publicized Ponzi scheme and sentenced to 150 years in prison. Under an IRS safe-harbor rule, a Ponzi scheme loss may be tax-deductible in the year of discovery if the lead figure in the scheme is charged with the commission of fraud, embezzlement or a similar crime or is the subject of a state or federal criminal complaint.
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Tags: Income Taxes, tax court, tax news, Taxes
