Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.
Monday, September 4, 2017
DEDUCTING CASUALTY LOSSES
A brief review of the rules for
deducting casualty losses.
You may be able to deduct a loss
from a casualty or theft on Schedule A.
A casualty is damage, destruction or
loss of property that results from an identifiable sudden, unexpected or
unusual event – such as a car accident, earthquake, fire, flood, hurricane,
storm, tornado, and the like.
Your loss is the lessor of –
•the adjusted basis of the property before the
casualty or theft, or
•the decrease in fair market value of the
property as a result of the casualty or theft.
In the case of a theft there is
generally no remaining fair market value, so your loss would be the adjusted
basis of the property stolen.
When calculating the deductible loss
you cannot use the market value of the
property damaged - you must use
the adjusted cost basis.The property
may have been worth $500,000 before the casualty, but if the cost basis is only
$200,000 your loss is limited to $200,000.
You first reduce the loss by any
insurance or other reimbursement you receive, or expect to receive.
If your reimbursement is more than your
allowable loss you may have taxable income.If you receive an unexpected reimbursement in a subsequent year, or if a
reimbursement received after your return claiming the loss has been filed is
not what you had expected when calculating the allowable deduction, you may
need to make an adjustment on a subsequent Form 1040.
Next you reduce the resulting net
amount by $100.00.This $100.00
reduction is per incident.If there is
only one casualty or theft during the year the reduction is $100.00.If there are two separate incidents, one
casualty and one theft, the total reduction is $200.00.
The total amount of all net casualty
and theft losses for the year, after subtracting actual or anticipated
reimbursements and the $100.00 per incident, is then reduced by 10% of your
Adjusted Gross Income (AGI).The
remaining amount is what can be deducted.
If the total amount of net casualty
and theft losses for 2017 is $9,500.00 and your AGI is $105,000.00 you get no
deduction ($9,500 - $10,500 = $0).
If you have a deductible casualty
loss in a disaster area, such as Hurricane Harvey, you have the option of
claiming the loss on the return for the year in which the casualty occurs –
your 2017 Form 1040 - or the previous year.This means that you do not have to wait until next year to get the
refund generated by the casualty loss – you
can amend your 2016 Form 1040 and get a refund now, when you need the money to
replace and repair.