Tax Guide for Deducting Losses – Casualties, Disasters & Thefts
When completing US federal tax returns, the good news is you can deduct losses that resulted from casualties and thefts. These deductions are valid provided your claims are filed in a timely manner and the losses are not covered by your insurance.
Preparing your deductions can be done much faster these days with the help of software which lets you work out your taxes online. Many accountants also use these programs on behalf of their clients.
This guide will look at the deductions you will be eligible for if you suffer losses from casualties, disasters and thefts.
Casualty Losses Explained
As taxpayer, you will generally be eligible for casualty deductions if you were powerless against property damages. For example, casualty losses can occur during sudden unexpected events such as earthquakes, fires, floods, hurricanes and tornadoes. A casualty loss is distinguished from regular wear and tear.
FEMA Disaster Areas
Many deduction-eligible casualties do not involve areas listed by FEMA, the Federal Emergency Management Agency. However, FEMA maintains an online list of federal disaster areas for which casualty claims may be made.
Approximately 100 federal disaster areas were declared in 2011. Some include regions affected by Hurricane Irene, Tropical Storm Irene, Tropical Storm Lee and the Japanese tsunami of March 2011.
FEMA’s list of disaster areas is posted at www.fema.gov. The list is easily searchable by year, state and disaster type.
Ineligible Property Damage
Certain property damage is not eligible for a tax deduction, even if you as a homeowner or taxpayer did not have control over the situation causing the loss. Some examples of this include property damage resulting from negligence, termites, or the excavation of an adjacent property.
Theft Deductions Explained
In IRS terms, a theft involves the removal of money or property with the intent to deprive its owner. The theft must have been done with criminal intent to be eligible for a deduction.
Deductions cannot be taken for certain criminal losses such as the theft of lug,gage aboard a ship however. Also, taxpayers are not able to deduct items that were wrongfully seized by law enforcement.
Adjustments for Personal Property & Rental Property
If your damaged property is for personal use (i.e. not for rentals) and has not been completely destroyed, then the amount you can deduct will be the lesser of either:
1) The adjusted value of your property.
2) The theft-related or casualty-related decrease in market value of your property.
If your property is a rental or is otherwise income-producing and is completely destroyed, then your loss will be adjusted with a consideration of the property’s fair market value prior to the casualty. In addition, any improvements you’ve made will be considered along with the property’s depreciation.
You can learn more about casualty adjustments by reading the IRS’s Publication 547, Casualties, Disasters and Thefts.
Using Schedule A to Report Losses
For most taxpayers, claims for casualty and theft losses can be made as itemized deductions on the Schedule A of Form 1040. Non-resident aliens should use Schedule A on the 1040NR instead. You can use these forms whether you’re filing taxes online or through the mail.
Follow these simple steps to fill out your Schedule A:
1. Subtract any salvage value and insurance payments or other reimbursement you have received for the damage or theft.
2. Subtract $100 for each casualty event or theft.
3. Subtract 10% of your adjusted gross income to calculate your allowable losses for the year.
Report Your Losses on Form 4684
IRS Form 4684 is used to report casualties and thefts. Use Section A to document lost personal-use property. Use Section B to document lost income-producing property.
For help completing Form 4684, see IRS Publication 584 for personal-use property, or Publication 584B for business-use property.
When to Report Casualty Losses and Thefts
Generally, casualty losses are deductible for the year in which the casualty occurred. However, if you suffered losses in a federally-declared disaster area, you have the option of reporting the loss for the preceding tax year instead. Of course, this involves amending a return if it’s already been filed.
Thefts are usually deductible for the year in which the owner discovered missing or damaged property. The exception to this would be if you have a reasonable chance of getting reimbursement through other means – your deductions will not be available until other reimbursement possibilities are ruled out.
Net Operating Loss – Deducting More than Your Income
If your loss deduction exceeds your annual income, then you might have a net operating loss. A net operating loss can apply not only to businesses but also to individuals. You have a net operating loss if a negative number appears on line 41 of Form 1040, line 39 of Form 1040NR or line 22 of Form 1041.
More information about this is available in IRS Publication 536, Net Operating Losses for Individuals, Estates, and Trusts.
Conclusion
As a US taxpayer, when natural disasters and thefts occur but are not covered by your insurance, you can take some comfort in filing for the special tax deductions as described above. You can obtain additional information about casualty and theft-related taxes online by searching the IRS and FEMA websites or consulting with a tax specialist.
About the Author:Bob Goren is an accountant and independent advisor for filing taxes online in the US.
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