Be Careful on Claiming Deductions for Casualty and Theft Lossesby
I’ve previously done columns on the usual rules for claiming deductions for casualty and theft losses. Claiming deductions for casualty losses might be apropos for those who suffered from recent, unexpected calamities such as the hurricanes in August and September that swept the US Gulf coastal states, Florida and nearby territories.
In this column, we’ll talk about some wrinkles in those rules.
File Claims and Account for Settlements
The IRS requires individuals who seek to write off casualty or theft losses to reduce their deductions to reflect any insurance settlements or other reimbursements that they receive or expect to receive.
Deductions Shrink for Failing to File Claims
It matters not that submitting claims might provide their insurers with excuses to boost deductibles, increase premiums or even cancel coverage. However, the IRS does concede that write-offs are allowable for amounts not covered by insurance, including deductibles.
Subtracting $100 Per Loss
The agency usually mandates another subtraction of $100 ($500 for certain losses incurred in disaster areas that are eligible for federal assistance) for each loss. But it orders only one $100 reduction when the same event damages several items. For example, the same flood damages a person’s home and detached garage or a year-round home and a summer cottage. The same is true when a hurricane damages a person’s dwelling twice — e.g., first by winds and then by high waves.
Losses must exceed 10% of AGI
Uninsured losses generally are allowable only to the extent that their total exceeds 10 percent of adjusted gross income. Just how much of a deduction is allowable, then, when someone suffers losses of $20,000 after insurance recoveries and AGI is $100,000? It shrivels to just $9,900 — that is, $20,000 minus $100 minus $10,000 (10 percent of AGI).
The limitations of $100 and 10 percent don’t apply to casualty or theft losses of business property or investment property, such as rental real estate. Those categories of losses are fully deductible.
Two sets of rules govern deductions for losses to property used partly for business and partly for personal purposes, such as a car. Use an allocation method to compute the loss deduction. Treat the event as if it was a loss to two pieces of property, one business and the other personal. Take a full deduction for the business use part, regardless of whether anything may be deductible for any personal use losses. In the case of a car used 70 percent of the time for business driving, claim a business expense deduction for 70 percent of the repair costs.
Incidental Expenses Relating to Casualties, Thefts
These expenses aren’t part of casualty or theft losses. Accordingly, no write-offs whatsoever are allowed for such items as: temporary lights; fuel; moving; rentals of temporary quarters and cars; legal fees to defend against suits for negligent operation of vehicles; towing charges; and the care of personal injuries, although these kinds of outlays may qualify as deductible medical expenses.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting).