EES Newsletter

June 2025

 

IRS Allows Loss Deductions for Financial Scams

Explains five scenarios in new ruling

 

The IRS has issued a new memo that “clears the way” for victims of investment scams to claim deductions under the tax code section for casualty and theft losses. The new memo, Chief Counsel Advice 202511015, clarifies the current rules.

 

Background: Previously, you could deduct unreimbursed casualty and theft losses exceeding 10% of your adjusted gross income (AGI), after subtracting $100 per event. For example, if a taxpayer with an AGI of $100,000 suffered $20,000 in damages to their home due to a wildfire, the deductible loss was limited to $9,900. Common theft losses included home burglaries.

 

However, the Tax Cuts and Jobs Act (TCJA) generally suspended the deduction for casualty and theft losses, except losses from natural disasters in areas formally designated as federal disaster areas. The Federal Disaster Tax Relief Act temporarily eliminated the 10%-of-AGI limit while raising the “floor” per event from $100 to $500, but the previous limits apply once again.

 

Nevertheless, if you are victimized by one of the many financial scams or frauds proliferating these days, you may be entitled to tax relief. Specifically, a loss is deductible if—

 

·         It results from criminal conduct classified as theft under applicable state law;

 

·         You have no reasonable prospect of recovering the stolen funds; and

 

·         The loss arises from a transaction entered into for profit.

 

Tax update: The new IRS memo provides five common scenarios to help determine whether a loss from a scam is deductible.

 

1. Compromised account scam: The taxpayer is contacted by someone impersonating a financial institution’s fraud specialist. The imposter induces the taxpayer to authorize distributions from financial accounts and then the victim transfers the funds to new overseas accounts controlled by the scammer.

 

2: Pig butchering scam: The taxpayer responds to an unsolicited email advertising a cryptocurrency investment. After small early successes, the taxpayer commits more money and then the scammer disappears with all the funds. This is called “pig butchering” because the scammer “fattens up the prey.”

 

3. Phishing scam: The taxpayer is tricked into providing login credentials for financial accounts. Subsequently, funds are withdrawn and deposited into an overseas account without the taxpayer’s approval.

4. Romance scam: The taxpayer develops a romantic relationship with a scammer online. The victim is convinced to authorize distributions to purportedly help the fraudster pay for a relative’s medical expenses. Naturally, the entire situation is a ruse.

 

5. Kidnapping scams: The taxpayer is convinced that a caller has kidnapped their grandchild and is demanding a ransom for their safe return. This may use a “cloned voice” of the supposed kidnapped victim. After the funds are sent, the scammer disappears.

 

In the first three scenarios, the taxpayers entered into transactions intending to turn a profit and now have little hope of recovery. Therefore, the losses are deductible. Conversely, the losses resulting from the romantic and kidnapping scams are personal and nondeductible.

 

The new memo also offers guidance to taxpayers victimized by Ponzi schemes like the one famously perpetrated by Bernie Madoff. Such losses may be deductible under a safe-harbor rule if the loss stems from a fraud by someone who has been criminally indicted or is the subject of a legal criminal complaint.

 

Final words: Stay vigilant. The best approach is to avoid scams and financial cons in the first place.

 

 

Applaud Tax-Favored Achievement Awards

Tax deductions for morale-boosting program

 

Do you want to inject more life into your moribund business? One possible solution is to create an achievement awards program for the company. For instance, you can promote the concept and hand out the awards at a year-end ceremony. This concept may boost morale and lead to greater productivity.

 

Also, if you stay within certain tax law boundaries, the awards are tax-deductible by the company and tax-free to the employees receiving them. It is a win-win tax proposition.

 

Background: Favorable tax treatment for achievement awards is not automatic. For starters, the award must be a tangible item that is granted to an employee for either length of service or promoting safety. It cannot, however, be disguised compensation for a significant work accomplishment or a job well done. 

 

This list of tangible items is a long one ranging from traditional gold watches to plaques inscribed with the winner’s name and achievement. But cash or “cash-equivalent gifts” do not qualify as tangible personal property. Therefore, you cannot reward employees with gift certificates or tickets to a luxury box suite at a local sports venue.

 

The plan must also meet the following requirements.

 

·         Any employee may receive a length-of-service award, but safety awards cannot be awarded to managers, administrators, clerical workers or other professional employees. Also, an award does not qualify for the tax breaks if the company handed out safety awards to more than 10% of the eligible employees during the same year.

 

·         The employee being honored must have been employed by the company at least five years to receive a length‑of‑service award. Also, this employee cannot have received a length-of-service award within the last five years. No repeaters allowed!

 

·         The award must be part of a “meaningful presentation.” That does not mean you have to host a bash at the swankiest banquet hall in town, but the event should be marked by a ceremony befitting the occasion.

 

Furthermore, there are limits on the value of the award, depending on whether the achievement awards plan is “nonqualified” or “qualified.” This is an important distinction.

 

If you have a nonqualified plan, the annual maximum award is $400. Conversely, the maximum for a qualified plan is $1,600—or four times much. Any excess above these amounts cannot be deducted by the employer and is taxable to the employee. (Note: These limits are not indexed for inflation.)

 

Two additional requirements must be met to qualify for the higher limits for qualified plans.

 

1. Awards must be granted under a written plan that does not discriminate in favor of highly- compensated employees (HCEs). For 2025, HCEs are employees with $160,000 or more in compensation.

 

2.. The average cost of all employee achievement awards granted during the year cannot exceed $400. However, awards of nominal value (e.g., T-shirts or water bottles with the company logo) do not count for this purpose.

 

Conclusion: If you think an achievement awards program may benefit your company, meet with a benefits specialist to discuss the particulars. This may become a valuable perk of working for your company.

 

 

Just Say “No” in Business

Showing strong leadership qualities

 

If you are the owner of a small business, you may be able to delegate some responsibilities and authority, but ultimately “the buck stops” at your desk. Everyone concerned—your employees, vendors and suppliers, customers and clients, business associates, etc.—relies on you to make the tough calls. And, sometimes, whether you like it or not, you just have to “say no.”

 

As the old saying goes, you cannot please all the people all the time. When you are the leader of the organization, you are forced to turn down certain requests or dismiss recommendations. How do you say you say no without feeling guilty or eroding loyalty? Here are some basic guidelines.

 

·         Realize your priorities. The first step in saying no is understanding that you need to do what is best for the business, not for others. Do not be swayed by emotional pleas or go along with a request just because it will make you more popular. If you get the reputation for caving in easily, employees and outsiders will begin to take advantage of your leniency.

 

·         Plan your response. At times, a request may catch you by surprise, and there is little you can do to avoid this possibility. However, in other instances, you may be able to anticipate what will be asked and prepare your answer beforehand. It can even be helpful to script out your answer—in writing—and rehearse it so you can meet your objectives in a sensitive manner.

 

·         Bide your time. When you are blindsided, resist the initial temptation to simply give in. Instead of blurting out a “yes,” tell the person that you need some time to think about it and will get back to them shortly. You will find that people will begin to accept this as the standard procedure and will not press you for an immediate answer.

 

·         Be concise. Usually, there is no benefit in offering a lengthy explanation to justify your position. If the situation calls for more clarity, keep it short. If you ramble on, it is more likely that your decision will be questioned or criticized. Once you have made up your mind, come right to the point.

 

·         Be definitive. Do not equivocate or offer vague answers. The message you are conveying should be clear and distinct. “No” means “no” and you cannot vacillate if you expect others to continue to respect you.  

 

Finally, do not waver if you start getting some pushback on your decision. When it makes sense, remain firm, even if the “no” is unpopular at first. Restate your position, if necessary, but do not go back on your word, barring any significant changes or new perspectives. This should be the end of the matter.

   

 

Tax Benefits for a “Medical Dependent”

How to deduct payments for a relative

 

It is tough—with a capital “T”—to qualify for medical expense deductions on your personal tax return, even if you otherwise itemize deductions. Reason: The threshold for deducting unreimbursed expenses is imposing. However, if you are near the threshold for 2025, do not allow any deductible expenses to slip through the cracks.

 

Notably, you may not be able to claim personal exemptions for a relative you support this year, but you could still count the medical expenses you pay on behalf of that relative towards your annual total. The relative does not necessarily have to be a member of your immediate family.

 

Background: Under current law, you can deduct unreimbursed medical expenses above 7.5% of your adjusted gross income (AGI). For instance, if you have an AGI of $100,000 in 2025 and you incur $8,000 in qualified medical expenses, your deduction is limited to $500. And, if your expenses fall below the $7,500 level, you get no deduction,

 

As a result, it is important to log in every deductible medical dollar you spend during the year. This includes expenses paid for yourself, your spouse and your children, like co-pays for visits to physicians, dentists or hospitals, as well as the cost of prescription drugs for these family members.

 

On the other hand, you cannot claim any personal exemptions for family members or other relatives. Previously, you could claim an exemption for a relative you help support—say, an elderly parent—if you provide more than half of their annual support and their gross income for the year did does not exceed the personal exemption threshold. (It was, for example, $4,050 in 2017.) The Tax Cuts and Jobs Act (TCJA) suspended these exemptions for 2018 through 2025. Note: This TCJA provision could be extended.

 

However, the IRS allows you to deduct medical expenses you pay for certain relatives. According to the Publication. 502, Medical and Dental Expenses, the relative does not have to qualify as your dependent as long as you provide more than half of their support. You do not have to pass the “gross income” part of the dependency test.

 

Example: Your elderly mother expects to receive $10,000 in Social Security benefits and $7,000 of taxable investment income in 2025. Because you give her $1,500 a month for rent and groceries, for an annual total of $18,000, you will provide more than half of her support for the year ($18,000 vs. $17,000). So, you can count the medical expenses paid for your mother as your own, regardless of whether she meets the technical definition of a “dependent” due to the gross income limit.

 

In this hypothetical example, your mother cannot deduct her medical expenses on her own personal 2025 return. But she probably does not qualify anyway or even itemize deductions. Also, the medical expense deduction is likely to be worth more to you in your high tax bracket than it is to her.

 

Practical advice: Takea close look at the situation with your professional tax advisor. Then adopt the approach that makes the most sense.

 

 

Touch All the Tax Bases

 

Can your small business deduct the cost of sponsoring a local Little League team or other youth sports outfit? The short answer is “yes.”

 

Ground rules: Generally, you can write off the cost of uniforms with your firm’s name stitched on the shirts as business advertising expenses. The deduction extends to the cost of caps, bats, balls, catcher’s mitts and masks and other equipment—even the payments for local umpires or referees.

 

Besides the tax deductions, you’re benefiting the youths in your community while you are building goodwill for your firm. Everyone comes out ahead.

 

 

Facts and Figures

Timely points of particular interest

 

Disaster Plans—With the onset of summer, the IRS is reminding taxpayers to protect important tax and financial information as part of a disaster emergency plan. As of this writing, the   Federal Emergency Management Agency (FEMA) has already issued 12 major disaster declarations in nine states impacted by winter storms, flooding, tornadoes, wildfires, landslides and mudslides in 2025. Reminder: Tax relief may be available but is strictly limited by the rules for casualty and theft losses.

 

Spousal IRAs—Normally, you can make IRA contributions up to the lesser of your “earned income” (e.g., wages) for the year or an annual limit. The limit for 2025 is $7,000 ($8,000 if you are age 50 or older). However, a married couple filing a joint tax return may qualify for a double contribution even if one spouse has zero or little earned income. Thus, the effective limit for married couples in 2025 is $14,000 ($16,000 if both spouses are age 50 or older). The couple can use any combination of traditional and Roth IRA accounts.