Can Loss Of Money From Scam Be Used As A Tax Deduction

Q: My elderly father was scammed by a phone call saying that his grandson (my son) was in jail in another state and that he could avoid a criminal record if money was immediately sent for bail and attorney costs. The money was sent and the whole thing was false. My father is embarrassed by the whole thing but I now wonder if he can at least get a tax deduction for the loss.

What you describe should qualify as a theft loss, but there are specific elements of a theft loss that must be satisfied to claim a tax deduction and, even then, the way the law computes the deduction is not favorable for your father.

First, the IRS defines a theft loss to be a taking of property that was illegal under the laws of the state where the act occurred and the taking was done with criminal intent. Courts have a slightly different definition, which can include taking by an act of "swindling, false pretense, and any other form of guile."

Your father's loss seems to fit either definition. Then he must also be able to prove that an act of theft occurred, which would be helped by a police report, the amount of the loss incurred and the year that the theft occurred (or was discovered, if later).

If he can satisfy each of these elements, then a loss is allowed as an itemized deduction. The loss must first be reduced by $100 and then, when combined with any other losses by theft or casualty, must exceed 10 percent of his adjusted gross income (AGI) for the year of the loss.

Many elderly taxpayers use the standard deduction and do not itemize deductions. If your father does not itemize deductions, any benefit of the theft loss is unavailable. Even if he does itemize deductions, the requirement that the loss, when reduced by $100, exceed 10 percent of his AGI will likely eliminate any tax benefit.

A more favorable result occurs when the loss was incurred in a business transaction. A business theft loss is allowed with no $100 reduction and is reported before AGI is computed, so the benefit of the loss is not dependent on itemizing deductions. But your father's loss was clearly incurred from a personal motive.

Phone and email scams are common, and in some cases (unlike your father's), the victim is persuaded to be a party to what may itself, if true, be an illegal act. In such cases, the tax law may disallow any theft loss because the victim's intended participation in an illegal scheme should not be rewarded with a tax deduction.

So, deductions have been denied where the victim was told that money was needed to purchase stolen property at a discount or to allegedly counterfeit currency. While the story was false, so theft was involved, it would violate public policy to allow the victim a tax deduction.

Q: I am 24 years old and very healthy, and my employer offers several health care options. I chose a high-deductible plan that comes with a Health Savings Account. I did this because I have a tight budget and my employer actually pays $800 per year into this HSA. This year, I have had only over-the-counter medications and have not spent any of the HSA. Do I have to spend the HSA money by a certain time?

No. Funds in an HSA grow tax free, much like a retirement plan. The money belongs to you and can be taken with you if you change jobs. Withdrawals for deductible medical expenses are tax free.

If you can afford it, it can make sense not to use the HSA funds so that you have a tax-deferred fund that can increase over time and serve as a savings account for future medical care costs. There is never any specific time that funds must be withdrawn from an HSA.

High-deductible plans that accompany HSAs can meet the minimum essential coverage requirement of Obamacare. This means you will not be penalized for lack of health care coverage.

There is a flexible spending account (FSA) that has a "use-it-or-lose-it" feature. But this feature does not apply to an HSA.

James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.