LET THE IRS SHARE YOUR LOSS FROM DISASTER OR THEFT

No one can take away the emotional pain of a loss. But tax deductions can lessen the financial impact.

When a hurricane strikes your home or a burglar breaks in and steals your most valued possessions, the effects are emotionally devastating.

The only financial solace comes if you’re insured and because the government allows you to deduct the losses, net of insurance, on your tax return. So after the tears and anger, start calculating the extent of the damage.

A casualty is legally defined as property damaged or destroyed from a sudden and unexpected event. Deductible casualty losses may result from a number of different causes, including automobile accidents, civil disturbances, drought, earthquakes, explosions, fire, flood, freezing rain, ice and snow, hurricanes, lightning, mine cave-ins, shipwrecks, smog, sonic booms, storms, vandalism, winds and tornadoes.

Gradual Damage Doesn’t Qualify

The event must be sudden and swift, not gradual or progressive. For example, the gradual erosion and damage to homes or other structures caused by weather and age does not qualify for a tax deduction. But if a burst water heater damages your carpet, floor and furnishings, your loss would qualify for the deduction.

If trees, shrubs or other plants are damaged or destroyed by a fungus, disease, insects, worms or similar pests, the loss is not deductible as a casualty loss. However, a sudden, unexpected or unusual infestation by beetles or other insects may result in a casualty loss. If a storm, flood or fire damages trees and shrubs, the loss also is a casualty loss.

Your tax losses kick in where your insurance falls short. If you have a policy with a $500 deductible, the government will not allow you to claim the $300 you received from your insurance company. Only the $500 balance not covered by your insurance policy is deductible, and even that amount must be reduced by at least $100 and probably more.

Losses Due to Criminal Acts Qualify

A theft is the unlawful and intentional removal of money or property from its rightful owner. It includes, but is not limited to, larceny, robbery and embezzlement. If money or property is taken as a result of extortion, kidnapping for ransom, or blackmail, it also qualifies for tax treatment as a theft.

If you lose a few hundred dollars just because you’re careless, the government won’t underwrite your losses. However, if a huge gust of wind blows the bills out of your hands — and you can prove it — that may qualify as a casualty loss that you can then deduct. The amount of loss deductible from a theft is the same as from a casualty.

Deductions Are Expedited for Disaster Areas

To claim a casualty loss deduction, you will need Form 4684 to calculate and report your loss and Schedule A to itemize your loss deduction. Attach both of these to your individual income tax return Form 1040.

Ordinarily, a casualty loss is deductible only in the year the event took place. However, a special provision in the tax code allows for “disaster area” loss deductions in the year prior to the occurrence. To qualify, the president must declare the region a “disaster area” eligible for federal relief under the Disaster Relief Act of 1964. Once this is done, you can elect to treat the entire loss as having occurred in the prior tax year. This allows you to get an immediate tax benefit rather than waiting until the subsequent year to claim it.

For the purposes of your return, let’s say the president declared your area a disaster area because of the extensive flooding it sustained in January . If you suffered extensive losses, you could immediately claim the losses on your return. (If you already filed your return, you must file amended returns on Form 1040X.) Alternatively, if you could not itemize in (even with the casualty deduction) or if your tax bracket was higher in , you could deduct those losses on your return.

If the flooding or damage occurs in (and we hope it doesn’t), and you have not yet filed a tax return for , you can deduct the loss on your return or wait until next tax season.

The choice is yours.

Calculating the Deduction for Casualty or Theft Losses

Once you have computed the amount of your casualty or theft loss, it must be adjusted three ways before you can deduct it:

Let’s say a tree fell through my roof and caused $15,000 in damages. Someone then gets into the house and steals my $750 DVD player. Here’s what happens: