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Casualty and Theft Losses

The loss of business or personal property may
provide a deduction on your individual income tax
return. But first you need to determine if the loss
qualifies for a deduction.
What is a Casualty?
A casualty is the damage, destruction, or loss of
property that results from an identifiable event that
is sudden, unexpected, or unusual.
An event that is sudden is swift, not gradual or
progressive. An automobile accident is a good
example. It’s usually over before you realize it.
An event that is unexpected is one that is generally
unanticipated and unintended.
An event that is unusual is one that is not normally
associated with the activity in which you are
participating. In other words, it’s one that is not a
day-to-day occurrence.
A casualty can be from a number of different
causes such as weather, fire, earthquake, terrorist
attack, or government-ordered demolition, just to
name a few.
Other events, though sudden and unexpected,
will generally not qualify as a casualty loss. For
example, the loss of an antique vase that breaks
when a family pet knocks it over would not qualify.
Progressive deterioration, such as termite damage,
is also not an eligible casualty loss. Even though
it is an unexpected and unusual event, it results
from a steadily operating cause rather than a
sudden event.
On the other hand, the loss of a diamond that
fell out of its setting can lead to a casualty loss
deduction, depending on how it was lost.
Proof of Casualty
The IRS may request to see proof of the casualty
deduction. You should be able to show the type of
casualty, such as a car accident, hurricane, tornado,
storm, fire, etc. and when it occurred. Retain proof
of your ownership in the property. However, if
you leased the property, be able to show your
contractual liability to the owner for the damages
that occurred. Lastly, you need proof of any
reimbursement (or potential reimbursement).
What is a Theft?
A theft is the taking and removing of money or
property with the intent to deprive the owner of
that property. To be considered a theft, it must
be identified as illegal under the laws of the state
where it occurred and it must have been done with
criminal intent.
A theft includes the taking of money or property
by blackmail, burglary, embezzlement, extortion,
kidnapping for ransom, larceny, and robbery.
Proof of Theft
The IRS may request to see proof of the theft loss
deduction. You should be able to show when you
discovered the property was missing and evidence
that the property was actually taken illegally. Retain
proof of ownership of the property taken illegally.
Lastly, you need proof of any reimbursement (or
potential reimbursement).
How to Determine the Loss
The first step in determining the amount of your
loss is to figure out what the property is worth.
For most items, the investment is what
you or someone else paid for the property.
Tip: This is where good recordkeeping pays off,
especially when it comes time to value an item you
purchased many years ago.
You also need to know the change in value of
the property before the event compared to after
the event. If the decline in value is less than your
cost, then it is this smaller amount that is used to
determine the loss. This amount is then decreased
by any insurance or other reimbursement on the
property. That insurance or other reimbursement
can actually lead to income from the casualty
instead of a loss, in which case different rules can
apply to limit reporting of that income.
With certain exceptions, a loss on property you own
and use personally is subject to some or all of the
following reductions:
1) Your deduction per item will be reduced by
$100 ($500 for 2009 only);
2) The aggregate total of all casualty and theft
items will be reduced by 10% of your adjusted
gross income; and
3) The 2% Schedule A rule that limits the
deduction for property used as an employee.
When to Report the Loss
Generally, a casualty is reported in the year of
the event and a theft is reported in the year it is
discovered. However, you may be able to take
advantage of special provisions if the casualty
occurred in an eligible federal disaster area.
If the loss is in an eligible federal disaster area, you
can amend last year’s tax return to claim the loss,
instead of waiting until the end of the year to file a
return. Claiming a loss on an amended return will
generally produce a refund that can certainly come
in handy to meet living expenses and restore your
property much faster.
Special Considerations
You may also be allowed special consideration if
the casualty is addressed through an income tax
relief provision.
The IRS highly publicizes who are eligible for
special considerations and what those are. The
special considerations can vary from one qualified
federal disaster area to another.
For large casualties affecting numerous people, it is
not uncommon for the IRS to create a publication
to help you and your preparer sort through all the
special provisions that may be available to you
if you were affected by that particular casualty.
A more recent publication is IRS Pub. 4492-B,
Information for Affected Taxpayers in the Midwestern
Disaster Area.
This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.
#870 – © Copyright May 2010
National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002
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