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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Hi Lev, In 2011 and 2012, an elderly tax payer “invested”

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Hi Lev,

In 2011 and 2012, an elderly tax payer “invested” her life savings, including her retirement fund, into a foreign lottery scam. In 2012 she also incurred unsecured debt (credit card cash advances and signature loans) and “invested” these additional funds in the same lottery scam. For 2012, the IRS is assessing taxes on the retirement funds since no taxes were withheld at the time of the withdrawal. Also, earlier this year the credit card company wrote off the cash advances, which could possibly result in her receiving a 1099 Misc at the end of this year.

•What is the best way to report these “investments” as casualty losses since the funds were “invested” over a two-year period, and how much can be claimed if the total loss exceeds taxable income?
•If the credit card company issue a 1099 Misc at the end of this year, can this be written off as a casualty loss for 2013, or will one of the prior year returns need to be amended?

Thanks!

Lev :

Hi and welcome to Just Answer!
You are correct - distributions from retirement plan are taxable in the year received (or considered as received).
The administrator of the retirement plan should issue form 1099R reporting taxable distribution.
The cancelled debt is reported on the form 1099C and generally is considered taxable income. You must report any taxable amount of a cancelled debt for which you are personally liable, as ordinary income from the cancellation of debt.
However - in some situations - when canceled debts meet the requirements for the exceptions or exclusions - such income is not taxable. For instance - if the taxpayer was insolvent at the time the debt was cancelled - that amount is not taxable.
10:47 PM

Casualty and theft losses is a separate issue. A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent.
Casualty and theft losses are generally deductible in the year the casualty occurred - not when the money were "invested." Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which it can be determined with reasonable certainty whether or not such reimbursement will be received.
Casualty and theft losses are reported on Form 4684, Casualties and Thefts. Section A is used for personal-use property. Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A. For property held by you for personal use, once you have subtracted any salvage value and any insurance or other reimbursement, you must subtract $100 from each casualty or theft event that occurred during the year. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year.

Just in case you were not able to use the chat - I am switching to Q&A mode and porting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

 

You are correct - distributions from retirement plan are taxable in the year received (or considered as received).
The administrator of the retirement plan should issue form 1099R reporting taxable distribution.
The cancelled debt is reported on the form 1099C and generally is considered taxable income. You must report any taxable amount of a cancelled debt for which you are personally liable, as ordinary income from the cancellation of debt.
However - in some situations - when canceled debts meet the requirements for the exceptions or exclusions - such income is not taxable. For instance - if the taxpayer was insolvent at the time the debt was cancelled - that amount is not taxable.

Casualty and theft losses is a separate issue. A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent.
Casualty and theft losses are generally deductible in the year the casualty occurred - not when the money were "invested." Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which it can be determined with reasonable certainty whether or not such reimbursement will be received.
Casualty and theft losses are reported on Form 4684, Casualties and Thefts. Section A is used for personal-use property. Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A. For property held by you for personal use, once you have subtracted any salvage value and any insurance or other reimbursement, you must subtract $100 from each casualty or theft event that occurred during the year. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year.

Customer: replied 3 years ago.

Hi Lev,



A year ago you addressed a similar issue:


http://www.justanswer.com/tax/6d5yt-possibilities-able-deduct-loss.html


 


Therefore it appears that the casualty loss can be deducted for 2012, which is the year that the FBI and the IL Atty General notified the taxpayer that this was a scam and there was no way to recover any of her money. It also appears that the full amount "invested" in 2011 and 2012 should be included in the casualty loss calculation for 2012, regardless of the source of the funds. Please let me know if you concur.


 


In the event that the bank issues a 1099C for the amount of the debt that was written off, where can I find the IRS guidelines for determining insolvency?


 


Thanks

1. As I mentioned above...
Casualty and theft losses are generally deductible in the year the casualty occurred - not when the money were "invested." Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which it can be determined with reasonable certainty whether or not such reimbursement will be received.
Thus - if the theft was discovered in 2012 - the loss is deducted in 2012.
The source of funds that were lost is irrelevant.
2
This publication will be very helpful - www.irs.gov/pub/irs-pdf/p4681.pdf
Specifically for insolvency - see page 5 and insolvency worksheet on page 8
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