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02-19-2018 12:07 PM
A family member was convicted of a white collar felony in 2016 and will be sentenced in 2018. As part of the sentencing, she will be required to make restitution. For discussion purposes, let's say the total restitution amount is $200,000. The $200,000 received was entirely reported on her 1040 (years 2009-2015) and in total, across all years, the total amount was $200,000 in income. The income was reported on Schedule C, and she paid federal, state and local income tax on all of the money received.
For discussion purposes, let's say the total tax paid on the $200,000 was 50%. Thus, she has paid $100,000 back via taxes to the federal government (and state/local). So, her NET was $100,000.
The federal court apparently will require the full $200,000 be repaid in full for restitution.
Let's also assume the harmed party is the government.
Question #1) Does anyone have experience with federal restitution and having the government be receptive to only requiring the NET amount of $100,000 be paid back? After all, the government already has 50% of the reported income.
Question #2) If the government insists the full GROSS amount of $200,000 must be paid back, does anyone have any experience in taking the restitution amounts paid back as a deduction in the current year of repayment?
Thank you for your time.
03-01-2018 08:06 PM - edited 03-01-2018 08:31 PM
Basing off the information you've provided, to answer your questions:
(1) Lowering your restitution part must be determined by the court that imposed it.
(2) In regards to paying back the restitution amount as a deduction in the current year of repayment on the individual tax return, there have been some cases where the restitution being paid back can be deducted as a business expense, but that depends on who was involved and what was the case about. For some examples, you can go to the following links:
In regards to your unique situation, please seek your own counsel.
Tax Research Specialist