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George Saenz, the Bankrate.com Tax Talk columnist Deducting IRA losses

Dear Tax Talk,
I contributed $5,000 to an IRA plan last year. The plan administrator purchased stock and then the public company went down to $0 and ceased trading. Are there any tax deductions or write-offs available to me?
-- William

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Dear William,
A basic tax principle is that you can't write off the same thing twice. If you made a deductible IRA contribution when you gave the funds to the plan administrator, you have already written off that money for tax purposes. If you were to receive that money later you would pay tax on it. Since you won't receive that money later, there is no further tax implication.

The only way you could claim a deduction for the lost funds is if the amount was put into a nondeductible IRA or a Roth IRA. Since monies in these accounts were not previously deducted for tax purposes, if you recover less than you contributed you have a tax loss. You can only recognize that loss (i.e., include it in your income tax return) when you have received all the funds in your IRA and that amount is less than your unrecovered basis in your IRA. Your basis in the IRA is the amount of your nondeductible contributions. The unrecovered basis is the difference between the amount that you contributed and the amount you received when you closed out the IRA.

The loss is considered a miscellaneous itemized deduction subject to the 2 percent of AGI limit for all miscellaneous itemized deductions. Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Bankrate.com's corrections policy-- Posted: April 25, 2007
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