|Casualty and Theft Losses|
|Wednesday, 05 November 2008 00:42|
If you have suffered personal losses from a theft or from disasters such as a fire, hurricane, tornado, or flood, you may be able to deduct these losses on your return. Personal casualty and theft losses are reported on Form 4684, Casualties and Thefts, Section A and entered on Schedule A. You must be able to itemize deductions on your federal return to be able to claim your loss. If you are in a federally declared disaster area and you do not itemize deductions, you may claim your net casualty losses as an addition to your standard deduction amount.
If your property is covered by insurance, you should file a timely insurance claim for reimbursement of the loss. If you do not file an insurance claim, the IRS may limit your eligible casualty or theft loss to the amount that is normally not covered by your insurance, such as your insurance deductible amount.
If the President of the United States declares your area a federal disaster area, you may be entitled to additional tax relief. If you have any questions about casualty and theft losses, contact “The Mobile Tax Man” for more information or assistance. http://www.irs.gov/publications/p584/index.html
See the following information relating to casualty and theft losses:
Defining a Casualty or Theft Loss
The cost of repairing damaged property, restoring landscaping to its original condition, or the cost of cleaning up after a casualty is not part of your deductible loss. If the repairs meet certain conditions, however, you may be able to use these costs as a measure of the decrease in fair market value of your property. You can use repairs as a measure of decrease in fair market value if all of the following are true:
You also cannot deduct the loss of future profits or income due to the casualty. For example, if the prices of homes in your neighborhood drop after a widespread flooding near your area, the decline in market value of your home is not a casualty loss.
A theft includes, but is not limited to, the taking of money or property by blackmail, burglary, embezzlement, extortion, kidnapping for ransom, larceny, or robbery. The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Generally, you cannot deduct the loss of property that has been simply lost or mislaid. However, if the accidental loss or disappearance of property results from a casualty, it could be deductible depending on the circumstances.
Expenses you incur for preventative measures against casualties and theft are not deductible as losses. Examples of preventative measures are boarding up your house before a hurricane, building a levee to prevent future flooding, or installing a security system after a break-in. Instead, you might be able to capitalize some of these expenses, if they are for permanent improvements, and add them to the basis of your property.
Incidental expenses you have as a result of a casualty or theft are not deductible and are not included in your total loss. Incidental expenses include the cost of medical treatment for personal injuries, the cost of temporary housing or hotel fees, or the cost of renting a car.
Proving a Loss
You must also show the IRS whether there is any reimbursement or recovery you can obtain for the property.
You will need to establish your basis in the property and the difference in the property's fair market value before and after the event. The amount of loss you can deduct will be based on the smaller of these as discussed in the Personal Casualty or Theft Losses section.
Save any police reports, newspaper articles, photographs or videos, bills of sale, receipts for improvements or repairs, payment checks, deeds, professional appraisals, copies of insurance claims, and insurance adjuster appraisals to support any casualty loss deduction you take on your return. If obtaining a professional appraisal is not cost-effective or possible, you may also be able to establish fair market value by using comparable classified ads or industry standard "blue book" values (for automobiles).
As a general rule, you should always keep any documentation to support the basis or fair market value of your property separate from your property. Keep copies with a family member, a friend, or in your safe deposit box to prevent loss of these documents when your property is damaged, destroyed, or stolen.
Personal Casualty or Theft Losses
Calculate your loss by using the smaller of the following:
Reduce your loss by any insurance or other reimbursement you receive or expect to receive.
You must further reduce your loss by $500. This $500 reduction applies to each casualty or theft event that occurred during the year, regardless of how many items of property are involved. Next, reduce your total casualty losses by 10% of your adjusted gross income (AGI). The remaining balance is the amount of your deductible casualty or theft loss.
If you use an appraisal to support your determination of the fair market value of your property, you can deduct the cost of getting an appraisal separately on Schedule A as a miscellaneous itemized deduction subject to 2% of your adjusted gross income.
For example, Jose bought a home a few years ago. He paid $150,000 ($10,000 for the land and $140,000 for the house). He also spent an additional $2,000 for landscaping. This year, a tornado destroyed his home, including the shrubbery and trees in his yard. An appraiser valued the property as a whole at $175,000 before the tornado, but only $50,000 afterwards. The insurance company paid Oscar $95,000 for the loss. His adjusted gross income for this year is $70,000. Calculate his casualty loss deduction as follows:
Deduct your loss in the year that the casualty occurred or the theft was discovered. If you have not received your insurance reimbursement at the time of your tax preparation, you can estimate the amount you expect to receive and use that amount on your tax return. If the reimbursement amount differs from what you expected, you may have to make an adjustment to your return in the year you actually receive the reimbursement. If you are not sure whether part of your casualty or theft loss will be reimbursed or recovered, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed or when you have a reasonable estimate of the amount of reimbursement. http://www.irs.gov/pub/irs-pdf/f4684.pdf
If you are in a federally declared disaster area, other rules apply. See the Federal Disaster Losses section for more information on when to deduct these losses. “The Mobile Tax Man” financial services office will be able to assist you in preparing these returns.
Personal Casualty or Theft Gain
Generally, you can choose to postpone all or part of the taxable gain if. To do so, you must purchase similar property within two years of realizing a gain from the casualty or theft.
If you are in a federally declared disaster area, other rules apply. See the Federal Disaster Gains section for more information on how long you can postpone a gain.
Disaster Area Losses
By amending your prior year return when the disaster occurs, you can get your refund for the loss sooner than waiting until the following year. However, you should compare your tax situation and adjusted gross income for both years to determine if it is to your tax advantage to claim the loss in one year rather than another.
If your home is located in a disaster area and your state or local government orders you to tear it down or move it because it is no longer a safe place to live, the resulting loss in value is treated as a casualty loss from a disaster. For you to deduct the loss, the order must have been issued within 120 days after the area was declared a disaster area.
Your net disaster area losses do not need to be reduced by 10% of your adjusted gross income. Net disaster area losses are the balance of all personal disaster losses minus all personal casualty gains.
The IRS may postpone for up to one year certain tax deadlines of taxpayers who are affected by a federally declared disaster. The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA. If the IRS postpones the due date for filing your return and for paying your tax and you are affected by a federally declared disaster, the IRS may abate the interest on underpaid tax that would otherwise accrue for the period of the postponement. The IRS will publish announcements in your local area and on the IRS web site if they postpone any tax deadlines in your area.
Federal Disaster Gains
Renters receiving insurance proceeds for damaged or destroyed property qualify for similar relief if their rented home is their primary residence.
If individuals such as your neighbors, friends, or relatives give you cash and do not place restrictions on how you should spend the money, these cash gifts are not included in your income and they do not reduce the amount of your casualty loss.
Food, medical supplies, and other forms of relief assistance you receive do not reduce your casualty loss, unless the assistance replaces your lost or destroyed property.
Reimbursements that exceed your losses or exceed the additional expenses you incur because of the casualty or theft may have to be included in income.
For example, the house Mary rents was damaged due to a tornado. Her town is not designated a disaster area. Her insurance company determined it was not safe for her to live in the house until the roof, walls, and carpeting are repaired or replaced, so the insurance agent has approved a $3,000 payment for temporary housing expenses. This reimbursement does not reduce her casualty loss, because it is not a payment made to repair or restore property. Belinda moves into an apartment for four months while the house is being restored. Her rent is usually $900 per month, but she must pay $1,100 for rent for the apartment because it is a short-term lease. The $800 additional rent expense she incurred [($1,100 apartment rent - $900 house rent) 4 months] is considered a tax-free reimbursement. Mary also had to stock up on groceries again and spent $300 more than she normally would have. The apartment is farther away from work, so she paid $40 more in gasoline than she normally would have. The remaining $1,860 reimbursement ($3,000 - $800 - $300 - $40) should be included as income on Belinda's return. Her insurance company also reimburses her for the personal property contained in the rental house that was damaged. Her reimbursement for the various pieces of furniture totaled $5,000. When she calculates the casualty loss on her return, she must reduce her loss by this reimbursement. Any reimbursement in excess of her loss should be included as income on her return.
If you are in a federally declared disaster area, different rules apply. See the Disaster Relief Grants and Payments section for more information on how long you can postpone a gain.
Disaster Relief Grants and Payments
Individuals who are disaster victims generally do not have to pay taxes on certain assistance payments they receive. This exclusion from income applies only to expenses compensated by assistance payments that are not otherwise compensated for by insurance or other sources.
A qualified disaster relief payment includes any amount paid to or for the benefit of an individual that is either:
A qualified disaster must be one of the following:
Therefore, taxpayers in a disaster area who receive grants from state programs, charitable organizations, or employers to cover medical, transportation, or temporary housing expenses do not include these grants in their income.
|Last Updated on Monday, 01 March 2010 02:30|
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