Form 4684, Casualties and Thefts
My wife and I recently found out that my mother-in-law was about to loss her home to foreclosure because she had been sending money to various people throughout the U.S. under the pretense of selling her timeshares. This has been going on since about 2012 to the tune of $250K-$300K. As a result of the loss, her current income is less then $30K/ yr and she is indebt to the IRS for around $25K because she depleted her retirement to pay for this scam. I've read the instructions for IRS Pub. 4684, which as I understand it, will only allow her to claim a deduction up to her current year's income of $30K. This is almost as bad as what has already happen. My question is, can my wife and I start to claim my mother-in-law as a dependent on our taxes, since we already supplement most of her bills, and still file form 4684 and claim the deductions up to our combined income, which would then be $130K/ yr?