2011 was an eventful year, filled with a few natural disasters such as earthquakes, hurricanes, tornadoes and more. It’s never fun to lose money due to a disaster, or to theft. However, you can mitigate some of the pain with a tax deduction. Your tax deduction can reduce your taxable income – and the amount of tax you owe.
However, you need to make sure that you follow the proper procedure.
Casualty Loss Deductions
The IRS considers a casualty loss as one that is the loss of property due to a sudden event. It can be damaged or destroyed, and it should be because of an event that is unexpected and identifiable. Demolitions related to disasters, car accidents, fires, floods, and other natural disasters are all deductible.
Being in an area declared a federal disaster area can help you with your tax deduction. However, you aren’t required to live in such an area to receive a tax deduction. Living in a federal disaster area, though, provides you with the ability to amend your tax return for the previous year, or you can claim a loss on the next tax return. However, you can only claim your loss on one year’s tax return.
You can’t take a deduction for losses that are the result of accidental breaking, pet-related breaking, arson that was committed on your behalf (you’re probably going to jail anyway), or car accidents caused on purpose, or through negligence on your part. Additionally, if you have let the property go through progressive deterioration, those losses are not deductible. Furthermore, you can not deduct casualty and theft losses for which you will be reimbursed through insurance. Any losses must be subtracted by insurance reimbursements.
Theft Loss Deductions
When your property is taken from you, you might be able to deduct the loss. Some of the actions that constitute a loss due to theft include blackmail, embezzlement, robbery, burglary, larceny, kidnapping for ransom, or extortion. When you have lost money or property in this way, you can often deduct the value from your income. But you have to be able to show that the money or property was taken from you with criminal intent, and with the intention to deprive you of the property or money; if it is taken on your behalf, so you can receive the deduction, the deduction is void.
Claiming Your Casualty and/or Theft Loss Deduction
When claiming a casualty or theft on your tax return, use Form 4684. Part A is reserved for personal-property and section B for business property.
Each event comes with a $100 threshold, so you can only use the amount that exceeds $100 on each event. Additionally, you can’t deduct any amount that is covered by insurance. Add up all the losses, and reduce them by 10% of your adjustable gross income. Here’s how it would play out if you have an AGI of $45,000, and your home fell in value by $12,000 due to damage from a tornado, and if you suffered the theft of an uninsured iPad of $800:
- Damage to house – $12,000 – $100 = $11,900
- iPad, $800 – $100 = $700
- Next, add up the total losses, to come up with $12,600
- Determine 10% of your AGI, $45,000 x 0.10 = $4,500
- Subtract that 10% from your total losses, $12,600 – $4,500 = $8,100
Your deductions from casualty and theft total $8,100; that’s how much you can reduce your income by. As always, it can help to consult with a tax professional to determine whether or not you are truly eligible for the deduction.