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Casualties, Disasters, Thefts & Taxes

You are going along and living your life to the best you can and then all of a sudden, something bad happens. It could be anything, an accident, a robbery, or a natural (or unnatural) disaster. You’re asking yourself “What now?” The short answer is: file a claim on your insurance and go from there. What most people don’t realize is that these happenings can also affect your taxes.

A theft is the taking of money or property with the intent to deprive the owner of it. It must be illegal under the law of the state where it occurred and been done with criminal intent. You don’t need to prove that the person who did it was convicted. The means of the theft includes, but is not limited to, blackmail, burglary, embezzlement, extortion, and robbery. Note: A decline in the value of a stock portfolio held for investment does not qualify as theft. That is taken as a capital loss on a Schedule D.

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. Some examples include car accidents, fires, floods, and storms. There are exceptions to every rule, and that is also true here. To see if your casualty qualifies, please consult a tax professional.

To find a value for your casualty or theft loss: 1) You must first determine your adjusted basis in the property BEFORE the casualty or theft. 2) Then you determine the fair market value (FMV) AFTER the casualty or theft. 3) From the smaller of 1 or 2, you subtract any insurance or other reimbursement you received or expect to receive. It is possible to actually have a GAIN on your casualty if any reimbursement is more than your original adjusted basis. If this happens, you may actually owe taxes on that gain. Please consult a tax professional if you think you have a gain.

Once you have found a value for your casualty or theft, we must then determine how much of that loss is deductible. If your loss was for personal-use property (e.g. house or car) we apply the $100 Rule and the 10 percent Rule. To do this, we take your loss and reduce it by $100. This reduction applies to each casualty or loss, even if several items were involved in a single event. The resulting value after applying the $100 Rule is then subject to the 10 percent Rule. The 10 percent Rule states that we must then reduce the loss by 10 percent of your adjusted gross income. If there is anything left after the 10 percent Rule is applied, that is your casualty loss deduction.

There are some special rules that apply to federally declared disaster losses. A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T Stafford Disaster Relief and Emergency Assistance Act.

You generally have to declare your casualty loss in the year it occurred. However, if the loss occurred in a federally declared disaster area, you can choose to deduct the loss in the year it occurred OR you can amend the return for the year immediately preceding the year in which the disaster happened. There are deadlines for making that decision. You must make the choice to take the loss in the prior year by the due date (without extensions) for filing your taxes for the year in which the disaster actually occurred or the due date (with extensions) for the preceding tax year. Example: if the disaster occurred in 2010, you have until April 18, 2011 to amend your 2009 tax return. You have 90 days to revoke your choice, but if you do that, you must return any refund or credit you received from making the choice.

If your home is located in a disaster area, it is possible for your state or local government to declare your home unsafe and order you to tear it down or move it to another location. For example: your home only sustained minor damage in a disaster area, but your home has been declared unsafe due to nearby mud slides. The order must have been issued within 120 days after the area was officially declared a disaster area. For purposes of figuring the loss, you use the value of your home BEFORE you move it or tear it down as the fair market value after the casualty.

IN ORDER TO DECLARE AND USE A CASUALTY LOSS FOR YOUR TAXES, YOUR HOME OR PROPERTY MUST HAVE SUSTAINED DAMAGE DURING THE DISASTER. If your home has lost value simply due to the fact that it is in an area that sustained damage or is in a federally declared disaster area, then you have no casualty loss deduction.

The above applies to casualty or thefts of personal-use property. Special rules apply if the casualty or theft happened to business or income-producing property. Please consult a tax professional for business casualties/thefts. FBN

Written by: Jeff Augenstein, Roxanne Augenstein, Wendy Thompson, Neils Mickelson.

Northern Arizona Financial Services: 526-3999


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