Retirees Hit by Scams Face Additional Burden Due to Taxation on Lost Savings
As the younger generation is struggling to save up for the future amidst rising costs that force them to live paycheck to paycheck, their predecessors are finding it hard to hold on to their savings amidst an onslaught of online scams. Retirees are increasingly falling victim to scams that not only deplete their savings but also result in substantial IRS tax liabilities. A recent comprehensive report, led by Sen. Bob Casey (D-Pa), chair of the U.S. Senate Special Committee on Aging, sheds light on the plight of older adults across several states, who have been targeted by fraudulent schemes.
The report highlights the detrimental impact of limitations on the theft loss tax deduction, particularly as outlined in the Tax Cuts and Jobs Act of 2017 (TCJA), commonly known as the Trump Tax Cuts.
Sen. Casey contends that these regulatory changes exacerbate the financial hardships faced by retirees who have fallen victim to scams. In a poignant statement accompanying the release of the "Scammed then Taxed" report, Sen. Casey underscores the urgent need for congressional action to reverse these changes.
"Congress should prioritize safeguarding fraud victims rather than compounding their suffering by subjecting them to taxes on stolen savings to offset tax breaks for the wealthy," he says.
Retirement savings have become a prime target for scammers, leaving victims facing not only financial losses but also substantial tax liabilities, as revealed in a recent report. Larry, a retiree from Pennsylvania, recently fell prey to a scam orchestrated by an individual posing as a Social Security Administration official.
Over a month, the scammer manipulated Larry into withdrawing his retirement funds by falsely claiming that his Social Security number had been compromised. Tragically, Larry was persuaded to transfer the money into a cryptocurrency investment, resulting in a staggering loss of $765,000. However, the ordeal didn't end there, as the senior was hit with an IRS tax bill exceeding $220,000.
Similar tales of financial ruin involving retirees are highlighted in the report, including that of a former White House scientist who lost $655,000 to a scam and was burdened with over $100,000 in taxes on those funds, as reported by The Washington Post.
Since 2018, changes in tax law have impacted the deductibility of theft losses for individuals. Previously, taxpayers could offset theft-related losses from their income through the casualty and theft loss deduction, but the Tax Cuts and Jobs Act (TCJA) narrowed this provision.
Presently, for tax years 2018 to 2025, individuals can generally only claim a theft loss deduction for personal-use property if it's attributable to a federally declared disaster. But losses from theft or scams related to business activities or profit-making transactions may still qualify for a deduction, and some states offer casualty and theft deductions as well.
"Existing IRS programs like Offer in Compromise may not be accessible to everyone due to their complexity," Sen. Casey explains. Proposals to reinstate theft deductions, such as one led by Senator Tammy Baldwin, aim to provide retroactive tax relief for scam victims.
But political divisions and an impending election make significant legislative changes regarding taxes unlikely this year. Meanwhile, scams persist as a significant issue, with Federal Trade Commission data revealing that Americans lost approximately $10 billion to 2.6 million fraud incidents last year, with older adults being particularly vulnerable to higher median losses compared to other age groups.