I used to be awesome at keeping up with my things. I had my own system of organization and it worked for me. I could find anything – from important papers to pencils to jewelry – without batting an eye. That was, of course, before the introduction of three little people and one furry beast to my life. Now, it’s a constant blur of putting things down and forgetting where I put it or having someone (or something) walk off with my things.
Not everything that gets lost in my house is found again. And not everything that gets lost is cheap. I’ve lost, over the past year, a bunch of insignificant things but also some more expensive stuff, including an iPad Nano, my favorite pair of earrings, and Coach sunglasses. This is why, I’m fond of saying, I can’t have nice things.
Still, those things aren’t the kind of things that cause real pain… What if I lost something really pricey? Like a diamond ring (which, for the record, I don’t own) or a really nice camera (which, again, I don’t own) or a pile of cash (and ditto)?
Sadly, for federal income tax purposes, you cannot deduct a loss based on the mere disappearance of property or cash. So an ordinary loss of your property is, for tax reasons, just bad luck.
However, an accidental loss or disappearance of property can qualify as a casualty loss for tax purposes if it results from an identifiable event that is “sudden, unexpected, or unusual.” In my house, while events are often sudden and unusual, they are rarely unexpected: if there’s one thing you learn about kids, it’s to expect anything.
Some solid guidance is often useful, however, so the Internal Revenue Service has defined those terms in its Publication 17 (downloads as a pdf) like this:
- A sudden event is one that is swift, not gradual or progressive.
- An unexpected event is one that is ordinarily unanticipated and unintended.
- An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.
Examples of events that might meet those criteria are losses from terrorism, vandalism, and natural disasters. It doesn’t have to be that dramatic, though. The IRS goes on to give an example that distinguishes between something bad happening and something rising to the level of a casualty. Losing your diamond ring, for example, is bad, but doesn’t rise to a casualty. However, the IRS distinguishes that if “a car door is accidentally slammed on your hand, breaking the setting of your diamond ring” which causes the diamond to fall from the ring – and that diamond is never found – “the loss of the diamond is a casualty.” See the difference?
To claim a casualty loss, you must itemize your deductions. You’ll report the loss on a federal form 4684, Casualties and Thefts (downloads as a pdf). On Page 1, at Part A, you report damage or loss of personal-use property.
If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of your adjusted basis (generally, the cost, with adjustments for improvements or depreciation) or the decrease in the fair market value of your property.
To the extent that you are able to salvage your property or if you were reimbursed by insurance or expect to be reimbursed by insurance, you must report those adjustments. It’s a great idea to take pictures, keep receipts and, in some cases, obtain an appraisal. If, as in the case of jewelry, you’ve insured the property, chances are that you have good documentation already. The costs of photographs and appraisals for purposes of valuation are not figured as part of the loss. You can, however, claim these costs as a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) limit on Schedule A.
To calculate your loss, after you’ve made adjustments subtract $100 from each casualty event (in our example, that would be the slamming of the car door) that occurred during the year. Then add up all those amounts and subtract 10% of your AGI from that total to calculate your allowable casualty losses for the year. Here’s a quick example: Your AGI is $50,000. You lost the diamond from your ring which was valued at $8,000. You receive $5,000 in insurance reimbursement. Your initial loss is $8,000 less $5,000 (reimbursement), or $3,000. That amount is reduced to $2,900 ($3,000 less $100). Since $2,900 is less than $5,000 (10% of your AGI), your casualty loss, for tax purposes, is zero.
If you had not received any reimbursement from the insurance company, your initial loss remains $8,000. That amount is reduced to $7,900 ($8,000 less $100). Your loss is limited to the overage from your AGI, so that means your casualty loss, for tax purposes, is $2,900, or $7,900 – $5,000 (10% of your AGI).
And no cheating: if you could have filed a claim with your insurance company and you didn’t, that’s on you. You may not, in that instance, claim the loss on your tax return.
You can’t consider sentimental value when determining your loss. Just because your ring or family heirloom may be priceless in your eyes, you must base your loss on the actual fair market value (fewer adjustments).
On Page 2, at Part B, you’ll report the loss of business or income-producing property. If your property is business or income-producing property (as opposed to personal property) and is completely destroyed, then the amount of your loss is your adjusted basis.
Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster, the rules are a bit different.
And here’s the best part: if your casualty or theft loss deduction causes your deductions for the year to be more than your income for the year, you may have a net operating loss (NOL). You can carry an NOL backward or forwards. This is one of the few times when you can carry a loss forward or backward even if the loss is not related to business.
