Personal/Non-Business Losses You May Deduct – Casualty and Theft Losses

Majority of personal expenses are not deductible. This include expenses paid for living, home rent, food, clothing, insurance, utilities, child support, auto payments, vehicle expenses interest on credit cards, etc. If you run a business (see How a home-based business may help you reduce your taxes) or you have unreimbursed employee expenses, you may be able to deduct a few of those.  However, a few of the personal expenses that you may be able to deduct are home mortgage interest, medical expenses, taxes, charitable contributions, casualty and theft losses, etc. These are reported on your Schedule A – Itemized Deduction. On this article, we will be discussing the casualty and theft losses you may be able to deduct.

When you own something that is stolen, damaged, or destroyed by an act of nature (such as an earthquake or a hurricane) or destroyed in an accident, you may be eligible to deduct those losses on your tax return. The lost or damaged items may not necessarily be a part of your business or trade, and include items such as your vehicle used for personal use, antique collectibles, jewelries, etc.

Casualty Losses

A casualty loss is any loss that incurred due to the damage, destruction or loss of property caused by an identifiable event that is sudden, unexpected, or unusual. It is sudden if it’s swift and not gradual or progressive. It is an unexpected event if it’s ordinarily unanticipated and unintended. And it is an unusual event if it’s not a day-to-day occurrence and not typical of the activity in which you are engaged.

• Deductible Events: earthquakes, fires, floods, mine cave-ins, shipwrecks, sonic booms, storms, hurricanes or tornadoes, terrorist attacks, volcanic eruptions, vandalism, etc.
• Non-deductible Events or Nature: a casualty loss is not deductible if the damage or destruction is caused by accidentally breaking items such as china ware under normal conditions, a family pet, a fire if you willfully set it or pay someone to set it, a car accident if your willful negligence or willful act caused it, progressive deterioration(damage as a result of a steadily operating cause or a normal process rather than from a sudden event.)

Providing Proof of Loss:

In order to deduct the casualty loss, you must provide records that indicate the following as proof of your loss:

1. the type of casualty (earthquakes, hurricanes, car accident, etc.)
2. The loss was a direct result of the casualty
3. You are the property owner, or if it’s a leased property, you are contractually obligated to the owner of the property
4. Whether a claim for reimbursement exist for which there is a reasonable expectation of recovery

Theft Losses

A theft is defined 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 laws of the state where it occurred and it must have been done with criminal intent. A conviction for theft is not necessary to report these losses and it is deducted in the year of discovery, not the year the theft occurred. For example, you went on a one month vacation in December of 2009 and came back in January of 2010. Your car was stolen on December 2009 and you did not find out about it until when you came back, which is January 2010. Thus, the theft loss will be reported on your 2010 tax return and not the 2009 return.

• Examples of Theft: blackmail, extortion, embezzlement, burglary or robbery, kidnapping for ransom, larceny, losses.
• Ponzi Schemes – Losses for Ponzi-type investments  schemes are deductible as theft losses of income-producing property for the year loss was discovered. You determine the deductible loss in Section B of Form 4684.

Providing Proof of Loss

In order for you to deduct the theft losses, you must be able to show proof that you had a casualty or theft. You must be able to substantiate the amount you claim for the loss. For theft losses, you must provide records that show the following:

1. When you discovered that your property was missing
2. Your property was stolen
3. You were the owner of the property
4. Whether a claim for reimbursement exist for which there is a reasonable expectation of recovery

Determining Your Loss Deduction

The amount of your loss and the amount of what you can deduct are two different things. This is because personal losses are subject to certain limitations. The first step in figuring out your loss deduction is to figure out how much is the loss amount. In general, the amount of the loss can be figured out using the following steps:

1. Determine the adjusted basis of the property before the casualty or theft.

2. Determine the decrease in fair market value of the property as a result of the casualty or theft.

3. From the smaller of the amounts you determined from (1) and (2), subtract any insurance or other reimbursement you received or expect to receive.

Deduction Limits

After you have determined your casualty or theft loss, you must figure out how much you can deduct. If the loss was to property for your personal or family use, there are two limits on the amount that you can deduct.

1. You must reduce each casualty or theft loss by $100 ($100 each)

2. You must further reduce the total of all your casualty or theft losses by 10% of your adjusted gross income.