There are tough restrictions on deductions for casualty and theft losses. They’re allowable only as itemized deductions on Schedule A.
Another barrier is that such losses aren’t fully deductible. Itemizers must subtract $100 for each loss. Also, losses are deductible only to the extent they exceed 10 percent of adjusted gross income.
No ownership, no deduction. Another stipulation is that the deduction is available only to the owner of the damaged property. For instance, even if you get stuck with the bill, you can’t claim a tax write-off for damage or destruction of a car registered in your child’s name.
This was made clear to the Omans, a Maryland couple who gave their 20-year-old son the money to buy a sports car that he registered in his name. Before he even acquired collision coverage, one of his friends totaled the car.
When filing time rolled around, the couple claimed a casualty loss. But the Tax Court sided with the IRS and threw out their deduction. Because they kept no strings on the gift to their son, the car – and the casualty loss – was his.
Suppose the couple’s college-student son doesn’t have any income in the year of the wreck or before against which he can deduct the loss. Is that the end of the story? No, because the tax code authorizes special treatment for casualty losses. Just like a business loss, the unused portion of a casualty-loss deduction can be carried back for three years and then carried forward for 20 years if not used up. So chances are the son eventually will be able to take advantage of the deduction.
Some examples: Robert Miller rented a car. He had no car insurance of his own and didn’t check off the insurance-protection block on his rental form. Robert wrecked the car and had to reimburse the rental company. The Tax Court agreed with the IRS that there’s no tax relief for someone driving a rental car that’s damaged or destroyed. The court cited this example: A mother whose home burns down can’t deduct the loss of property owned by her children.
Consistent with its Oman and Miller decisions, the court barred a theft-loss deduction by a shareholder of a corporation for funds embezzled from his corporation. The loss was suffered by the corporation, not the shareholder.
The Tax Court refused to allow a theft-loss deduction for costs incurred by a father trying to find a daughter who had been abducted by a former wife. The deduction is allowed only for a loss of property. Moreover, the item stolen must have an adjusted cost basis and a fair market value at the time of the theft. The daughter can’t be considered property, noted the court, as “the ownership, purchase, and sale of human beings, commonly known as slavery, has been barred since the adoption in 1865 of the 13th Amendment to the Constitution.”
Nor, according to an IRS ruling, can a parent deduct payments to ransom a kidnapped child.