Accident insurance or total theft covers almost everyone’s loss from an accident disturbance.Tornadoes, earthquakes, fires, hurricanes, and other natural disasters cost taxpayers and insurance companies billions of dollars in losses each year. Thefts, particularly auto theft and personal residence thefts, are in a separate category, also costing taxpayers and policyholders billions of dollars annually. This page will explain which casualty and theft losses are deductible, who can deduct them, and when.. (To read the background, see Do you need accident insurance?)
The sudden event test
To be tax deductible, a casualty loss must meet the criteria for the sudden event test, which requires the following:
- The loss must occur as a result of a sudden, unpredictable, or unusual event.
- The event must be one that occurs in a single instance, such as a car accident, and cannot have occurred over an extended period of time.
- There must be an element of chance or some kind of natural force involved.
Under this definition, losses due to the following events would qualify for the deduction:
- Natural disasters, such as earthquakes, hurricanes, typhoons, tornadoes, floods, fires, and avalanches. (To learn more about being prepared for natural disasters, read Eight Financial Safeguards If a Disaster Strikes.))
- Losses from civilian rest, such as riots
However, there are several types of losses that would not qualify for the deduction:
- Those incurred due to long-term processes, such as erosion, drought, wood decay, or termite damage
- Any loss arising from what the IRS considers a “foreseeable” event.
- Losses arising from negative public perception.
Here’s an example of a loss that isn’t deductible: A couple owns a house perched on a cliff, along with the rest of the neighborhood, overlooking the city. Unfortunately, erosion has caused several houses adjacent to his property to collapse and tumble over the cliff. However, their property remains intact, and city building officials allow them to continue living there.
When they try to sell their home three years later, they discover that their home’s value has dropped by a whopping $150,000 due to buyer hesitancy stemming from the public’s negative perception of the property due to the catastrophe. They are forced to sell their home for $175,000 less than what they paid for it. Neither this loss nor the losses suffered by the owners whose houses collapsed are deductible.
Who can deduct a loss and when?
Within certain limits, only the owner of the lost item can deduct the loss in the year it occurred. The year an owner learns a theft is deductible. He can deduct his landlord fees if a sudden and unanticipated incident destroys the property he rents.
If the taxpayer expects full recovery in a subsequent year, the loss (or at least the amount for which they reasonably expect recompense) should not be deducted. a loss. An amended return must be filed if the refund is never received.If a taxpayer’s home burns down in 2010 and they expect insurance proceeds in 2011, they should not record a loss on their 2010 return. However, if the insurance company denies the claim in 2011, then the taxpayer must file an amended return for 2010 to claim the loss.
Losses from insolvent banks and other savings institutions
When a financial institution that offers demand deposit accounts becomes insolvent, its customers can deduct uninsured losses as casualty losses or non-business bad debts. If none of the losses were insured, an investment loss can be claimed. However, investment losses are limited to $20,000 per institution and are also subject to the 2% adjusted gross income (AGI) threshold. The institution must be under federal and/or state jurisdiction for any loss to be deductible. Learn about bank account security at Bank Deposits Insured?Will Bankruptcy Protect Your Assets?
Tree and shrub loss
Any loss related to trees and shrubs must meet the sudden event test, although this may include destruction by insects if there is a sudden infestation lasting only a few days. Personal property vegetation losses are calculated by comparing the full value before and after destruction. This grouping includes structures, dirt, and growth. Commercial properties value trees and bushes separately.
For a theft loss to be deductible, the taxpayer must show that the loss was due to theft; mere suspicion of theft will not suffice.Missing property does not constitute theft loss. If you leave your house one morning and find the empty kiddie pool in your yard gone, you can’t claim a deduction since it could explode. But if you go out to get your mail and find your mailbox has been uprooted, that would be considered a loss due to theft because there is no other reasonable means by which your mailbox would be missing. Acceptable evidence of theft may include statements from witnesses who saw your property stolen, police reports, and newspaper accounts of the theft.
Calculation and presentation of claims and losses due to theft
IRS Form 4684 reports casualty and theft losses as miscellaneous itemized deductions on Schedule A of Form 1040.. Therefore, for any casualty or theft loss to be deductible, the taxpayer must be able to itemize deductions. If this is not possible, no loss can be claimed.
There are other conditions that must be met as well. Generally, the amount must be greater than $500 and meet the 10% adjusted gross income limitation.
Example: Claim Provisions Carl has a $2,500 loss to cover his auto insurance deductible when his car is totaled. His home was also burglarized later that year, and $3,000 worth of jewelry was stolen. Your adjusted gross income was $40,000 last year, and you can itemize deductions.
Your losses can be calculated as follows:
|10% AGI limitation||$4,000|
|current deductible amount||$500|
A separate floor of $500 is subtracted from each loss, and then the remaining amounts are added. The IRS has arbitrarily mandated that any amount in excess of the 10% AGI limitation is deductible. Insurance reimbursements are not deductible and must be reported as income in following years.
Form 4684 covers just personal property damages. Deduct business losses elsewhere. Casualty and theft losses can be deferred three years or advanced 20 years. Excess losses are net operating losses.
Taxpayers in presidentially declared disaster areas can modify their preceding year’s tax return to disclose their losses and receive an immediate refund. The federal emergency management agency has a list of qualified catastrophe areas and years. This requires a statement explaining the preceding year deduction and basic disaster details. This election’s deadline is either the current fiscal year’s ordinary filing deadline or last year’s extended deadline. Those who record the loss in a prior year and change their minds have 90 days to reverse the election and return any reimbursement.If their net disaster loss exceeds insurance or other compensation, victims in certain places do not have to fulfill the 10% AGI criterion. They can record the loss on Form 4684 of the standard deduction worksheet without itemizing deductions.Schedule A itemizers report it.