“It was devastating. I felt like my life was threatened during the scam,” says Johnson, 75, a retired government worker who asked that her real name be concealed for her protection. The majority of the lost money was from her retirement account. “When it was over, I realized most of the stolen money counted as taxable income,” she says. “I couldn’t get a deduction for the lost money. The IRS even charged me interest on taxes I couldn’t pay by the deadline.”

Johnson’s tax bill is shocking, but her situation is not uncommon. Since a 2017 tax law change halted a long-standing deduction for stolen money, fraud victims across the U.S. have been slammed with federal income tax bills as high as hundreds of thousands of dollars. “It’s like victimizing someone twice,” says Nancy Rossner, executive director of the Community Tax Law Project in Richmond, Virginia.

And government rules make scam victims pay in more ways. Taxpayers younger than 59½ can also face a 10 percent penalty on withdrawals from 401(k)s, IRAs and other retirement accounts even if the money was scammed, Rossner says. Many pay dramatically higher state and local income taxes that can add up to tens of thousands of dollars or more. Investment withdrawals in a scam can also trigger income-based Medicare premium hikes of up to $578 a month. While some victims qualify for deductions and appeals, many do not.

“What other victim of a crime has to pay taxes on their loss?” asks Amy Nofziger, senior director of fraud victim support for the AARP Fraud Watch Network. “Victims tell me it feels like a secondary trauma—first from the criminal, then from the government.”

Before 2018, taxpayers could deduct money or property lost to a scam, theft or disaster on their federal income taxes. In 2017, President Donald Trump signed the Tax Cuts and Jobs Act that ended most of those deductions. There are a few loopholes that help some scam victims. According to a 2025 IRS memo, victims can take a federal income tax deduction if they believed the scam would increase or safeguard their money. But that doesn’t include many common scams. “Romance scams, grandparent scams, kidnapping scams and any scams where the victim was trying to help someone are not deductible on a federal tax return,” says tax attorney James Creech, who works in the San Francisco office of accounting firm Baker Tilly. “It’s heartbreaking.”

The taxable portion of money withdrawn in a scam—such as from retirement accounts funded with pretax money, investments that have earned interest and stocks and bonds that have increased in value—counts as taxable income. This can mean big tax bills, Creech says.

The stakes are high. As much as $81.5 billion was scammed from older adults in 2024, according to the Federal Trade Commission.

A bill in Congress would restore the deduction for money lost in scams and allow victims of scams dating back to 2018 to take the deduction if they file an amended tax return.

“This is one of AARP’s priorities,” says Clark Flynt-Barr, AARP’s government affairs director for financial security. “We have endorsed this legislation and are hopeful it will pass.” In January, Kathy Stokes, senior director of fraud prevention programs for the AARP Fraud Watch Network, told the U.S. Senate Special Committee on Aging that the tax is “an insurmountable burden for many victims who no longer have the ability to pay this tax bill due to the fraud loss.”

Meanwhile, AARP is exploring ways to bring relief to scam victims hit with high Medicare premiums, says Andrew Scholnick, an AARP government affairs director for Medicare. Currently, in order to appeal, beneficiaries must show proof that the criminals behind the scam were convicted. But few scammers are caught or convicted, he says. AARP has recommended letting victims present financial records as proof instead. Visit aarp.org/money/scams-fraud/fighting-for-you to learn more about AARP’s efforts.

Unless and until the law changes, options are few and unsatisfying.

Former social worker Barb Putnam, 74, of Washington state, saw her 2026 Medicare premiums jump by about $530 a month after losing nearly $300,000 in a 2024 scam. She worked with a legal clinic to get a deduction on her federal taxes but is still fighting for Medicare relief. “As a single mother with two daughters, I worked long and hard for this money,” she says. “Now I’ve gone back to work to rebuild my savings. And I can’t afford repairs on my home.”

Scam victims may be tempted to ignore tax liabilities—but that will only make things worse, Creech says. “If you’ve been scammed, talk to somebody,” he advises. And be sure to keep statements of scam losses and records of interactions with criminals, he says. “A tax attorney or legal clinic can help, but so can an accountant, who can give you advice on next steps. It’s better to file your tax return than to skip it because you feel overwhelmed.”