House Committee Approves Bill to Restore Fraud Loss Tax Deductions, Full House Action Uncertain

The House Ways and Means Committee approved the Tax Relief for Fraud Victims Act on July 1 by a 39-0 vote. The bipartisan legislation would eliminate the disaster-only limitation for both personal casualty and theft losses that became permanent under the Tax Cuts and Jobs Act last year.

It would also let taxpayers claim the deduction in the year the loss occurred rather than the year the fraud was discovered.

Victims who withdrew funds from a traditional 401(k) or IRA may still owe income taxes on the distribution and face the 10% penalty if under age 59½. An IRS memorandum issued in March 2025 states that investment fraud losses remain deductible because of the profit motive involved, while losses from impersonator or romance scams do not qualify.

The bill would waive the 10% early-withdrawal penalty for victims who tapped retirement accounts.

Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas, said many retired victims lack taxable income in later years after losing retirement funds. Federal Trade Commission data show consumers reported $15.9 billion in fraud losses in 2025, the highest on record and a 27% increase from $12.5 billion in 2024. Reported losses have risen nearly 430% since 2020.

Investment scams produced the largest total at more than $7.9 billion, while imposter scams generated the most reports. Clark Flynt-Barr, AARP's government affairs director for financial security, said the growth in large losses stems largely from retirement accounts being cashed out.

Among adults age 60 and older, six-figure losses reached $1.6 billion, or 68% of the $2.4 billion reported lost by that group in 2024.