Amount not covered by car insurance may be deductible

I was in a car accident recently and my
insurance only paid for part of the damage. Does the casualty loss deduction
apply to this situation?

B.P., Crawfordsville

Let's get one thing out of the way first: Did you cause the car accident by acting negligently? For example, did you rear-end the car in front of you in order to make a point about how slowly the driver was moving? Or did you crash your car into a telephone pole car after an evening of tipping beers at the local brewpub? If so, the IRS doesn't want to hear about your problems.

As long as you didn't willfully cause the accident or behave in such a way that was likely to cause an accident, you may be entitled to a casualty loss deduction. If your insurance (or that of the other vehicle owner) reimburses you for the damage to your car or directly pays someone to fix your car and you're not out any cash, there is no tax effect. The insurance paid on your behalf is not income to you and the cost of repairs is not deductible.

It's good that you reported your accident to the insurance company. Accidents involving insured vehicles do not generate a casualty loss deduction unless you make an insurance claim. The amount that is not covered by the claim is the amount you will place on Form 4684, Casualties and Thefts. In other words, you can't make a decision not to file an insurance claim, and then try to take a tax deduction for the un-reimbursed loss. People are sometimes reluctant to file insurance claims because they fear their premiums will increase. The IRS is tough on this: no claim for reimbursement to the insurance company equates to no claim for a deduction on your tax return.

In order to take a deduction for your loss, you should have some evidence that a loss actually occurred. Write down information such as the date of the accident, how it happened, and save some proof that you were the owner of the property. Also, save the records relating to the claim with the insurance company.

When Congress started thinking about giving us a casualty loss deduction, they probably hung around the IRS offices and asked for advice on how to make this confusing enough so that people would have to work for the deduction. After all, what fun would it be to have a line on the tax return called "Casualty Loss," and have instructions that read, "Enter the full amount of your casualty loss on this line." Everyone knows that a deduction isn't worth the paper it's written on if there aren't:

  • at least four pages of rules,
  • several special publications that you can order for
    free from the IRS (Publication 547, Casualties, Disasters, and Thefts
    (Business and Non-business), Publication 584, Non-business Disaster, Casualty,
    and Theft Loss Workbook, and, for those of you who want to read about other
    ways in which you can get rid of your belongings, Publication 544, Sales and
    Other Dispositions of Assets), and
  • a separate two-page form on which you calculate how much of a deduction you can claim (Form 4684)

When figuring out how much (the IRS thinks) you lost in your accident, follow these steps:

Determine how much you paid for the car and the cost of improvements that you made (improvements mean things that add to the value of the car, not oil changes and super wax jobs)

Determine the difference between what the car was worth on the open market before the accident (such as the Blue Book value) and what it. s worth after the accident

Take the smaller of the amounts you got in 1 and 2 and deduct the amount of insurance you received. Whatever is left over is the amount you can claim as a deduction.

Just in case all of that made sense to you, there are just a couple more confusing pieces. On Form 4684 you are instructed to reduce the amount you think you get to claim as a casualty deduction by the smaller of $100 or the amount that you calculated in step 3 above. In other words, if you ended up with an $84 loss in step 3, you reduce it by $84, leaving you with no deduction. If step 3 left you with a $250 loss you reduce it by $100.

If you still have something left to deduct, reduce whatever pittance remains by 10% of your adjusted gross income. Is your deduction still above zero? If it is, you can carry the remaining portion to Schedule A -- that. s right, after all this, you have to be able to itemize your deductions in order to claim the casualty loss.

Any questions? Check with the IRS. I understand they. ve been spending a lot of time on the highway lately, causing car accidents, knowing nobody will bother trying to take a deduction.

copyright © 2000 Gail Perry - Fun with
Taxes

You may like these other stories...

IRS audits less than 1 percent of big partnershipsAccording to an April 17 report from the Government Accountability Office (GAO), the IRS audits fewer than 1 percent of large business partnerships, Stephen Ohlemacher of the...
Legislation coming out of Washington just might reduce homeowners' burden for disaster insurance. It's a topic very much on everyone's minds since the mudslide in Oso, Washington. The loss of human life was...
Divorce is hard, and the IRS isn't going to make it any easier. The IRS generally says "no" to tax deductions that might ease the pain of divorce. In certain circumstances, however, you might be able to salvage...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.