With April 15th looming in the near future, many folks are
scrambling to give Uncle Sam a good reason not to
confiscate their hard earned pay. And while there are an
assortment of arguments and deductions available to the
creative taxpayer, an often overlooked one is the deduction
for unreimbursed Casualties, Disasters, and Thefts.
Insurance doesn't cover everything all the time
Psst...come over here...a little closer...I want to tell
you a secret. Despite your insurance agent's best efforts,
not every claim you file is covered by insurance. "No
%#@*" you say?!? "I pay all that money in insurance
premiums and when (fill in the blank) happens, all I hear
is "that's not covered" "Well, thanks for nothing!"
We're from the government and we're here to help
How many stories end with the IRS riding to the rescue?
Well, none actually. However, the IRS can help ease the
pain in the case of certain unreimbursed casualty losses.
What is a casualty loss? A casualty is the damage,
destruction, or loss of property resulting from an
identifiable event that is sudden, unexpected, or unusual.
Can you give me some examples? Damage to property caused
by floods, fires, earthquakes, car accidents, and tornados
just to name a few. So what types of losses aren't
deductible? Destruction done by a family pet, dropping and
breaking fragile items, and anything you intentionally burn
up or pay someone to destroy (NO KIDDING!!!) are all not
deductible. What if my stuff was stolen? You're still in
luck (sort of)! The IRS defines theft as the taking and
removing of money or property with the intent to deprive
the owner of it. The taking of property must be illegal
under the law of the state where it occurred and it must
have been done with criminal intent. Sounds great! Where
do I sign up? Well, before you go getting all misty eyed
over your new found affection for the IRS, let's take a
deep breath. Like everything involving taxes, there are a
few hoops you have to jump through. First of all, you have
to itemize your deductions. So if you're filling out
1040EZ, you're out of luck. The only way to claim these
deductions is to file Form 4684 and attach it to schedule A
on a regular 1040 form. Another thing to consider is that
any reimbursement you receive from your insurance company
is not deductible. In fact, IRS publication 547 states
that if you expect to be reimbursed for part or all of your
loss, you must subtract the expected reimbursement when you
figure your loss. What if I decide to not file a claim with
my insurance company and instead take a deduction on my
taxes? Good idea but the IRS won't allow it. If your
property is covered by insurance, you must file an
insurance claim for reimbursement of your loss. Otherwise,
you cannot deduct a loss as a casualty or theft. The only
silver lining here is that if your insurance company
reimbursed you minus a deductible, your insurance
deductible is deductible from your taxes. Confused yet?
Can you help me make sense of this? PLEASE! Unfortunately,
things get slightly more complicated. For the purposes of
this article I will forgo explanations pertaining to the
$100 Rule and the 10% Rule. Just suffice it to say that
these are two more calculations that are required before
you arrive at the amount of your deduction. Instead, let
me show you an example which will hopefully bring this
togehter for you:
In June you had a car accident and your car was totaled.
You did not carry collision coverage on your car. You paid
$18,500 for the car. At the time of the accident the car
was worth $17,000. The salvage value of the car after the
accident was $200. Your adjusted gross income for the year
the casualty occurred is $70,000. You figure your casualty
loss deduction as follows:
1. Adjusted basis of car (cost in this example)
$18,500
2. Value of car at time of accident
$17,000
3. Value of car after the accident $200
4. Decrease in value (line 2 minus line 3)
$16,800
5. Loss (smaller of line 1 or 4)
$16,800
6. Subtract insurance $0
7. Loss after reimbursement
$16,800
8. Subtract $100
$16,700
9. Subtract 10% of $70,000 AGI $7,000
10. TOTAL CASUALTY LOSS DEDUCTION $9,700
Although a $9,700 tax deduction may not be as desirable as
a $17,000 check from your insurance company, in this case,
it's better than nothing. So the next time you suffer a
property loss that's not fully covered by insurance, you
may still be elgible for some financial relief. And that
could cause you to say something you've never said before
"Thank you IRS!"
----------------------------------------------------
Eric D. Patrick is an attorney and Chief Operating Officer
of Consumers Insurance Agency Inc. in Camp Hill, PA. Please
contact us at http://www.consumers-insurance.com and
http://www.thatsnotcovered.com . Providing our clients
with meaningful advice and thoughful service for over 25
years.
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