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Former President Trump’s signature 2017 tax law is having a ripple effect on scam victims: They’re required to pay federal taxes on the money they lost.
It’s a nightmare scenario, as Kate Kleinert knows all too well. In August 2020, the retired secretary and widow began an online romance with a man posing as a United Nations surgeon in Iraq. As he supposedly traveled to meet her in Pennsylvania, he claimed he’d been arrested and needed $20,000 for bail. Ultimately, she lost $39,000 in the scam. Then her tax accountant delivered shocking news: She owed $5,000 in federal taxes on the losses.
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“At first I didn’t believe him,” she says. “I don’t expect the government to give me back the money that I lost through the scam. But to not be able to get a tax break, when there are so many hundreds of frivolous tax breaks out there for people who hardly need them ... it was another smack in the face.” (Kleinert now works with AARP to fight fraud.)
“The thief stole most of their life savings, now the government demands the rest,” says Christopher Anderle, director of Legal Action of Wisconsin’s (LAW) Low Income Taxpayer Clinic. “An income tax is supposed to tax those who have the ability to pay. Theft victims have lost the ability to pay, which is why, previously, they could deduct the loss.”
An April 2024 report, “Scammed Then Taxed,” from the U.S. Senate Special Committee on Aging, offered more examples of scam victims hit again by taxes, including Helen, a retiree in California who lost $277,000 — almost her entire life’s savings — to cybercriminals posing as Microsoft agents. She faces a potential tax liability of $60,000.
Why the law changed and its impact
So why was the deduction removed? “No one really knows,” says Anderle. “Usually you get committee explanations about particular positions. There wasn’t one here. It was a rushed process. There was no official reasoning behind why victims of theft should have their taxes so dramatically increased.”
Meanwhile, the law will likely affect an ever-growing number of people as scams increase in sophistication and frequency. Americans lost more than $10 billion to fraud in 2023, a 14 percent jump from 2022 and an astounding 317 percent rise since 2019, the Federal Trade Commission reported in February 2024. And yet the losses may be higher than the official numbers indicate, since many victims don’t report their losses or seek tax assistance, says Anderle.
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