Transcripts

"Kevin McCormally's Tax Tips"-Investment Theft Rules

SUSIE GHARIB: More fallout in the Bernie Madoff scandal. New York's attorney general today charged financier Ezra Merkin with fraud. Merkin is accused of secretly steering almost $2.5 billion of client money into Madoff's Ponzi scheme without permission and earning fees of nearly half a million dollars in the process. Merkin's attorney says clients knew where their money was invested and that Merkin himself was duped by Madoff. Meanwhile, the IRS is helping victims of Ponzi schemes. In our tax tips segment tonight, we look at new rules on investment theft. Here's Kevin McCormally, editorial director at "Kiplinger's Personal Finance."

KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: Know who's going to be the biggest single loser in the Bernie Madoff Ponzi scheme? Uncle Sam, as victims write off billions of dollars of losses on their tax returns and shave their tax bills as a result. But rather than worry about the tax revenue that will have to be made up by the rest of us, let me address the direct victims of the fraud and how they can get Federal help. As a result of the Madoff mess, the IRS has come up with simplified rules for deducting theft losses from Ponzi schemes. This is important now because since the Madoff fraud was discovered in 2008, the losses can be written off on 2008 returns that are due next week. Usually, victims of theft have to figure how much they can reasonably expect to recover before they know how much they're allowed to deduct. But the new IRS rules say Ponzi scheme victims can automatically deduct 95 percent of what they invested in the scheme and any fictitious income they reported and paid tax on over the years. Now, if they're suing to try to recover part of their loss, the write-off drops to 75 percent of the amount invested. Once everything is settled -- and that could be years -- the IRS and the victims will square things up. There's another key issue. With legitimate investments, the law caps net capital loss deductions at $3,000 a year. But these theft losses are considered ordinary losses, so there is no limit on the write-off. In fact, if the loss is more than your 2008 income -- and in many cases it's sure to be far, far more -- the victim can use the loss to reclaim taxes paid over the previous five years, all the way back to 2003. Still have leftover losses? They can be carried forward to offset income for the next 20 years. I'm Kevin McCormally.

KANGAS: If you have tax questions for Kevin McCormally, you can email him at the tax tips section of NIGHTLY BUSINESS REPORT's web site on pbs.org. You can also learn more about the stories in tonight's broadcast, watch our streaming video and take part in our daily blog or email us at nbr@pbs.org.