I received some recovered income from a ponzi scheme settlement for a scheme investment that I had deducted in a previous year. Do Where on Schedule B do I report this?

[sortofred]

I received no tax form for these recovered monies.

[RobertB4444]

You can go and amend the return that you took the deduction on if it wasn't more than a few years back.  That's easiest.

But if you need to do it on the 2023 return enter it as a sale of the original investment with a basis of zero, a purchase date of the date of the original investment and a sale date of the date that you received the money.

@sortofred 

[sortofred]

Thank you for your response.  However, the initial investments were not used to purchase any shares.  Thus I cannot show purchase let alone a sale.  My inclination is to post the recovered amount under Miscellaneous Income.  I just don't see where I can denote what this is from, if that would be necessary. Originally I filed the loss in 2019 using form 4684: Casualties and Theft.

[KrisD15]

You only claim income for the reimbursement if your tax liability would have changed the year you claimed the loss, had the recovered amount not been included in the amount of loss claimed that year. 

If you claimed the loss on Schedule A, but ended up using the Standard Deduction, the recovered income does not need to be reported. 

If you did claim Itemized Deductions, and your Itemized Deductions were greater than the Standard Deduction by the amount of the recovery, report the recovery as income. 

(in other words, if the  Standard Deduction was 24,800 and your Itemized Deduction was 30,000, you were 5,200 over Standard. You receive 4,000 recovery. 4,000 is reported as income since your itemized was over by at least this much.  

Instead lets say you receive 6,000 recovery. Now only 5,200 would be reported as income since you would have taken the Standard Deduction in the year of the loss.)

IRS PUB 525 page 25

If you used Rev. Proc. 2009-20 to claim the loss, you would have claimed either 75% or 95% of the loss. In this case only claim the recovery which is more than 25% or 5% (depending on whether you claimed 75% or 95% originally).

IRS Bulletin 

If you do need to report income from the recovered loss, enter that under

• Personal Income
• Less Common Income
• Miscellaneous Income, 1099-A, 1099-C
• Start
• Scroll down to "Reimbursed deductions from a prior year"
• Start
• Select "Casualty or Theft Loss deducted as an itemized deduction in a previous year"
• Continue
• Enter the recovery (or portion of the recovery) 

[sortofred]

Kris:

Thank you, this was very helpful!

One last question to clarify: I did itemize my deductions in the year I took the loss which amounted to approx $31,000 as Casualty and Theft alone being on Schedule A ,  which was derived from Form 4684 (Casualties and Theft) where I used the 75% rule ( approx $41,000 was the actual monies lost due to the Ponzi scheme).  With my other deductions included, my total itemized deductions that year were well in excess of what my standard deduction amount would have been that year (I file as single). I received a recovery in 2023 of $7006.  If I understand your answer correctly, since the $7006 does NOT exceed the 25% of this $41,000, I do NOT need to report this recovery as income?

[KrisD15]

That is correct. 

This is similar to when state tax is limited to 10,000. 

Since you limited the loss to only 75%, recovered funds, up to the 25% not claimed as a loss, is not claimed as income. 

[sortofred]

Once again, thank you Kris.  So if there is a second recovery, which I hear may be a slight possibility, only if the total amount (the $7006 + the possible second amount) then exceeds the 25% will I claim the excess.  I appreciate your help.