Deducting Casualty and Theft Losses

A couple of years ago, we were robbed right before Christmas.  Someone broke into our home while everyone was out, and took my laptop, some other electronics, and the money my wife had earned from a craft show.  Thankfully, no one was hurt, and we were able to repair the damage fairly easily.

Others may not be so lucky, and suffer what is called a casualty or theft loss.  While most people know what a theft is, a casualty loss is one where property is damaged, destroyed or lost due to an event that is sudden, unexpected, or unusual in nature.  Additionally, it can be the result of a government mandated demolition or relocation of your home due to a disaster.

Fortunately, these types of events can be deductible on your taxes.  Let’s take a look at how to claim a casualty or theft loss as an itemized deduction on schedule A of your tax return.

The first thing to do is to determine the amount of the loss.  You will need to determine which is lower, the basis in the damaged or stolen property immediately before it was damaged or stolen, or the decline in the property’s fair market value due to the loss or casualty.  Next, you will need to reduce the lower of these two amounts by any insurance reimbursements you receive.  Next, subtract the $100 floor that is in place for each occurrence (hopefully, it is not more than one).

Finally, group all your items of casualty together and get a total.  Take this total and reduce it by 10% of your adjusted gross income.  This is the amount of your deduction.

In determining the amount of the loss for reporting on your taxes, you will need to complete Form 4684 Casualties and Thefts, which feeds the amount onto Schedule A with the rest of your itemized deductions.

If your losses are large and exceed your income, you may have a net operating loss for the year.  You can carry back this loss to a previous year (or years) and get a refund for the years to which the loss was carried back.

You want to be sure to keep good records of the casualty loss deductions taken, as well as any insurance payouts received.  These reduce the amount of your basis in the property which will be used when you sell the property and need to determine any gain or loss.

What experiences have you had with reporting casualty and theft losses on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

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