Tag Archive for Theft Loss

Casualty and Theft Loss – IRS Form 4684

March 21, 2011 Casualty Loss, Theft Loss

Your vehicle was hit by hail and the insurance company agreed to compensate you $4,600 AND allow you to keep the vehicle AND not issue you a salvage title.  In most situations this is non reportable.  However not always.  This may be reportable on IRS Form 4684 Casualty and Theft and quite possible on Schedule D as a Capital Gain if you are reimbursed by an insurance company an amount greater than your cost basis in the vehicle as in this example.

  1. Cost of Vehicle $15,000
  2. FMV before accident  $6,000
  3. FMV after accident $4,000
  4. Decrease in FMV (line 2 −line 3) $2,000
  5. Loss (smaller of line 1 or line 4) $2,000
  6. Subtract insurance reimbursement. $4,600
  7. Gain after reimbursement  $2,600 reported on Schedule D
Or it may be reportable on IRS form 4864 as in this example, presuming you itemize your deductions on Schedule A.
  1. Cost of Vehicle $15,000
  2. FMV before accident  $6,000
  3. FMV after accident $1,000
  4. Decrease in FMV (line 2 −line 3) $5,000
  5. Loss (smaller of line 1 or line 4) $5,000
  6. Subtract insurance reimbursement. $4,600
  7. Loss after reimbursement  $400
  8. Subtract $100
  9. Loss after $100 rule $300
  10. Subtract 10% of whatever your Adjusted Gross Income (AGI) is (for this example say AGI = $2,000)
  11. Casualty loss deduction $100
Or it may be non reportable altogether as in this example.
  1. Cost of Vehicle $15,000
  2. FMV before accident  $6,000
  3. FMV after accident $1,000
  4. Decrease in FMV (line 2 −line 3) $5,000
  5. Loss (smaller of line 1 or line 4) $5,000
  6. Subtract insurance reimbursement. $4,600
  7. Loss after reimbursement  $400
  8. Subtract $100
  9. Loss after $100 rule $300
  10. Subtract 10% of whatever your Adjusted Gross Income (AGI) is (for this example say AGI = $50,000)
  11. Casualty loss deduction $0
For more info check out IRS Publication 547 and the instructions for IRS Form 4684

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Casualty, Disaster and Theft Loss Deduction

July 20, 2010 Asset Classification, Casualty Loss, Disaster Loss, Theft Loss

Losses incurred because of a casualty, disaster, or theft may be tax-deductible. Casualty and theft losses are reported on Form 4684 and Form 1040 Schedule A.

Casualty Loss

A casualty is the loss of property (including damage and destruction) because of a sudden event. The event must be identifiable, unexpected, and unusual. Events that meet this criteria include:

  • car accidents,

  • disaster-related demolition,

  • earthquakes,

  • fires,

  • floods,

  • hurricanes,

  • shipwrecks,

  • storms,

  • terrorist attacks,

  • tornadoes,

  • vandalism, and

  • volcanic eruptions.

Non-Deductible Casualty LossesLosses are not tax-deductible if the damage or destruction of the property is the result of:

  • accidental breaking (such as dinnerware or glassware breaking),

  • pet-related accidents (such as the cat knocking over a valuable object),

  • arson committed by or on behalf of the taxpayer,

  • car accidents that are willful or willfully negligent and that are caused by or on behalf of the taxpayer, or

  • progressive deterioration. Progressive deterioration is damage that steadily occurs over a long period of time. Damage caused by termite infestation, dry rot, and wet rot are classic examples of non-deductible progressive deterioration losses.

To be tax-deductible, the damage must be caused by a sudden event (such as a sudden natural disaster or a sudden infestation).

Theft Losses

Loss of property because of theft may be tax-deductible. According to the IRS, “a theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.” You may have a theft loss if you are the victim of

  • blackmail,

  • burglary,

  • embezzlement,

  • extortion,

  • kidnaping for ransom,

  • larceny, or

  • robbery.

Mislaid and Lost PropertyProperty that you have mislaid or lost is not a theft and is generally not tax-deductible. However, if you lost property because of a sudden, unexpected, and unusual event, your loss may qualify as a casualty loss.

The IRS provides the following example of lost property that would qualify as a casualty loss:

  • “A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond is a casualty.”

  • Losses on a Bank DepositIf you lost money because your bank became insolvent, your loss may be a casualty loss or an ordinary loss.

  • If your deposit at the bank, savings & loan, credit union, or other financial institution was a federally insured deposit, then you may claim a casualty loss.

  • If your deposit was not federally insured, then you have an ordinary loss. Your ordinary loss is reported as a miscellaneous itemized deduction on line 22 of Schedule A.

Calculating the Casualty Loss Deduction

Casualty and theft losses are limited by an $100 threshold per loss event and an overall threshold of 10% of your adjusted gross income. To phrase this another way, your casualty loss is deductible to the extent that it exceeds $100 per loss event, and to the extent that it exceeds 10% of your AGI.

For example, John suffered two losses last year: his uninsured laptop computer was stolen, and later an earthquake caused damage to his home. Each event is subject to a separate $100 limitation. Let’s say his stolen laptop was worth $1,500, then applying the $100 limitation, we have a loss of $1,400. Similarly for the damage to his home. Now, John’s total casualty and theft losses, when added up, are reduced by 10% of his adjusted gross income. Let’s say the damage to his home reduced his property value by $10,000, and John has an adjusted gross income of $30,000. The calculations would go like this:

  • Event 1 Stolen computer ($1,500 – $100) = $1,400

  • Event 2 Damaged house ($10,000 – $100) = $9,900

  • Total Losses ($1,400 + $9,900) = $11,300

  • 10% Threshold ($30,000 AGI x 10%) = $3,000

  • Deductible Losses ($11,300 – $3,000) = $8,300Casualty and theft losses are reported and calculated on Form 4684 (PDF) and using Instructions for Form 4684.

Helpful Links

Publication 547, Casualties, Disasters, and Thefts
Form 4684 (PDF)
Instructions for Form 4684

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Investment Theft Losses

October 27, 2009 Theft Loss

Victims of investment schemes or fraud may find themselves under the casualty loss rules, rather than using the net capital loss rules to salvage their position. Sec. 165(e) allows reporting a deduction for theft losses in the year in which a “reasonable taxpayer” discovers that the property was missing.

Revenue Ruling 2009-9 covers the tax treatment of fraudulent investment arrangements under which income amounts that are wholly or partially fictitious have been reported as income to the investors. In it, the IRS clarified that the investor is entitled to an ordinary theft loss, rather than just a capital loss. Next, it determined that the theft is not subject to the $100 floor ($500 in 2009)/10 percent AGI limitation because it arose in connection with a transaction entered into for profit and, therefore, is covered by Sec. 165(c)(2), rather than 165(c)(3). Finally, although the investment theft loss is deductible in the year that the fraud is discovered (subject to reduction for amounts for which a reasonable prospect for recovery remains), the investment theft loss forms part of the taxpayer’s net operating loss that may be carried back or forward under normal NOL rules.

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