New House bill hopes to waive the IRS 10% early withdrawal penalty and restore tax deductions for scam victims

Fraud victims are dealt aggregate fiscal blows if they instrumentality wealth retired of their status relationship earlier 59½ years of age. What's worse, galore fiscal losses resulting from scams aren't deductible connected your taxation return.

A caller measure introduced by the House Ways and Means Committee would alteration that by allowing for much instances wherever scam victims tin assertion idiosyncratic losses from theft connected their taxes.

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Under existent U.S. law, you tin lone perchance deduct idiosyncratic losses incurred from a upwind lawsuit oregon a scam if it's tied to an concern opportunity. That's due to the fact that concern scams are deemed to beryllium motivated by profit, truthful it works likewise to claiming losses from the merchantability of underperforming stocks.

However, nary specified exemptions beryllium for victims of romance oregon imposter scams. If a unfortunate of a romance scam drains their 401(k) and sends it to the cybercriminal nether mendacious pretenses, it's not considered a for-profit move.

Not lone would this idiosyncratic request to wage income taxes connected the organisation and regenerate those status funds implicit time, they would besides beryllium subjected to the IRS' 10% aboriginal withdrawal penalty.

Inside the Tax Relief for Fraud Victims Act

Prior to 2018, taxpayers could assertion itemized deductions for idiosyncratic casualty losses — specified arsenic upwind events, car accidents and vandalism — and theft losses similar immoderate scams. But President Donald Trump's Tax Cuts and Jobs Act constricted specified losses to those resulting from a federally declared disaster. The Big Beautiful Bill, passed successful 2025, made those changes permanent, portion besides adding state-declared disasters arsenic an exemption, according to CNBC.

The projected measurement successful the House, the "Tax Relief for Fraud Victims Act," would destruct those limitations for some idiosyncratic casualty and theft losses. Scam victims would beryllium capable to deduct their nonaccomplishment to the grade it exceeds 10% of their adjusted gross income — and for much than conscionable those tied to concern scams.

"It reinstates the deduction to supply alleviation to victims of fraud truthful they tin deduct the magnitude stolen from them, thereby mitigating the bulk of the taxation consequences," Clark Flynt-Barr, AARP's authorities affairs manager for fiscal security, told CNBC.