How to deduct casualty and theft losses

Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles.

The country and North America have been experiencing unprecedented natural disasters over the past several months.

From Hurricanes Irma, Jose and Maria to earthquakes in Mexico, there have been an exceptionally high number of natural disasters in the recent months.

Although Northeast Ohio has been directly spared from these natural disasters, some Northeast Ohioans have been impacted nevertheless. From vacation homes in Florida to family and friends in Puerto Rico, Mexico, Texas and Florida to name a few. Most people have at least been indirectly impacted by these events, and many have been directly impacted.

Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal return.

You may not deduct casualty and theft losses covered by insurance, unless you file a timely claim for reimbursement and you reduce the claimed loss for tax purposes by the amount of any insurance reimbursement or expected reimbursement. In other words, you can generally claim a tax deduction for personal casualty losses to the extent that they are not covered by insurance.

For federal income tax purposes, a casualty loss occurs when the fair market value of your property is reduced or obliterated by a sudden event such as a hurricane, earthquake, flood, or volcanic eruption for example. For tax purposes, property losses due to theft or vandalism would also qualify.

Unlike casualty and theft losses, losses that have occurred through slow deterioration of the property are not deductible. In other words things such as accidental breakage, damage from a family pet, damage from a continually leaking roof or basement that has not been addressed, bad debts, or lost property are not considered casualty or theft losses and are therefore not covered by this tax deduction.

Unfortunately, the way the law is written the tax deduction will probably be significantly less than you might expect, as the deduction is limited.

First, the actual loss must be reduced by $100 after it has been reduced for any applicable insurance proceeds. This is not significant, but the second requirement is much more significant.

The second requirement requires you to further reduce the amount of the loss by 10 percent of your adjusted gross income. So, for instance if your adjusted gross income is $60,000 the amount of the deductible loss is reduced by $6,000 which is 10 percent of the $60,000 adjusted gross income. The higher your adjusted gross income the corresponding higher reduction in the allowable loss. Essentially, your adjusted gross income includes all your taxable income items with specific reductions for items such as IRA contributions, HSA contributions, alimony paid, and self-employee health insurance costs.

The final requirement to be able to deduct your casualty and theft losses is that you itemize.

Many taxpayers unfortunately believe that they can deduct the full current replacement cost of a missing or damaged item. However, this is incorrect as the deduction is also limited to the items depreciable value and not necessarily its replacement cost. The wise taxpayer will spend some time in advance documenting and cataloging each of their possessions so that in the event of a catastrophic loss there is an appropriate record. Photographs taken and receipts of big ticket items are quite helpful as supporting documentation.

I don’t know about you, but I would be hard pressed to list everything in my home if I had a personal catastrophe.

If you have disaster-related losses to business property you do not have to worry about the $100 subtraction or the 10 percent of Adjusted Gross Income

Nevertheless, having a record of your personal items, and planning accordingly could be very helpful in the event that you do have an unfortunate situation occur.

subtraction rule. You can deduct the full amount of the uninsured loss as a business expense on your business return or on the appropriate schedule of your Form 1040 if you operate as a sole proprietor.

Although we may not always have the best weather and such in Northeast Ohio, we are generally free from these types of natural disasters.

Nevertheless, having a record of your personal items, and planning accordingly could be very helpful in the event that you do have an unfortunate situation occur.

Paul Pahoresky