taxes

Determining theft loss deductions

George Saenzq_v2.gifDear Tax Talk,
My 83-year-old father has been a victim of Internet scammers. He has cashed out all of his retirement accounts (and now has IRS liens), borrowed against insurance polices, used payday lenders, avoided paying bills and is now ready to file bankruptcy and move in with me. 

I have spent over a year trying to have a guardian appointed for him. I finally have the documents necessary to make this happen. My question is: I've heard about being able to deduct gambling losses from taxes, but is there any way some of the early withdrawal penalties might be removed/reduced because all the funds have been lost to the scammers? I'm sure the IRS doesn't have a "stupidity" deduction though!

By the way, months ago, his doctor refused to sign the guardianship documents because based upon testing he does not have dementia but was suffering from delusions. The doctor knew all the details of the scams, yet he refused to sign the document that basically said, "I feel this person needs someone else to take control of his finances for his own well-being."

Dad agreed to see a psychiatrist. Five minutes into a 50-minute session, he signed the form for me.
-- Mark

a_v2.gifDear Mark,
It makes you wonder what the doctor's side businesses are. After a quick search, I couldn't find a stupidity deduction. Your father's only recourse would be if the losses could be claimed as theft losses.

Theft losses are deductible the same as a casualty losses. These losses are considered an itemized deduction to the extent that each loss is reduced by $100, and the total of the losses for the year are reduced by 10 percent of adjusted gross income. The ability to claim the losses will help offset the income your father has from the retirement account withdrawals. Further, a theft loss is more advantageous than a capital loss, which is limited to a $3,000 overall deduction.

Theft typically includes the taking of money or property by the following means:

  • Blackmail.
  • Burglary.
  • Embezzlement.
  • Extortion.
  • Kidnapping for ransom.
  • Larceny.
  • Robbery.

The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.

The type of scams and the amount lost will determine if your father can benefit from such a claim. For example, if your father's intention was to transfer his retirement account to another investment and that investment turned out to be a misrepresentation (i.e., nonexistent), he could possibly claim a theft loss.

However, if the investment merely was not good or sound, his loss would be more along the lines of a capital loss. Depending on your father's IRS problems, it may make sense to consult a tax professional on this matter.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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