Casualty & Theft Losses Commonly Overlooked
A commonly overlooked tax deduction is available for casualties and thefts. Taxpayers must itemize deductions to claim the loss. Tax professionals with an EA license are qualified to assist taxpayers with claiming these deductions and, when necessary, defending them with the IRS.
In addition to stolen property, a loss occurs when an insolvent or bankrupt financial institution causes a depositor to lose money. Deductible casualty losses involve property damage or destruction. Casualties must have a cause that's sudden and unexpected, not gradual. Casualty loss is not deductible when caused by progressive events or anticipated typical occurrences.
Common casualty losses occur from storms, automobile accidents, fires, and floods. Another type of tax-deductible loss happens when the government orders property demolition or the relocation of a home due to safety concerns related to a natural disaster.
The loss is determined by gathering both the taxpayer's basis in the property and the decrease in fair market value of the property as a result of the casualty or theft. The smaller amount is the loss. Therefore, the tax-deductible loss is never more than the taxpayer's basis.
However, the fair market value is not considered for loss on property used in business or for the production of income. In such cases, loss is determined as the basis in the property less any salvage value and reimbursed amounts (such as insurance proceeds). For example, a rental house that's completely destroyed by fire results in a loss of the owner's original cost basis less adjustment for prior depreciation. The continuing education enrolled agents complete yields important benefits in understanding these concepts.
The type of property involved in the casualty or theft affects calculation of the tax deduction for the loss. A loss on personal-use property is limited to the amount by which the loss exceeds $500. This reduction is applied to each event, not every piece of property involved in a single event. In addition, the deduction is limited to the amount of loss-after subtracting the $500-that exceeds 10 percent of the taxpayer's adjusted gross income. Courses that meet EA CPE requirements simplify these calculations.
An enrolled agent course is also applicable to understanding other tax rules. For example, the deduction may be limited for loss on a taxpayer's personal residence that's also partly used for business. Further complicating matters is the potential limitation of loss for property used in a passive activity.
A special rule applies to loss or theft of property used as an employee. This type of loss is added to any other un-reimbursed employee expenses for the year. The total is deducted as a miscellaneous itemized deduction rather than as an ordinary casualty or theft loss. As such, the deductible amount is the part to the total that exceeds 2 percent of the taxpayer's adjusted gross income. This rule substitutes for the customary casualty and theft reductions of $500 and 10 percent of adjusted gross income. Keeping track of the various rules is an important function of tax CPE.
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