Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays.
A reader named Jimmy recently wrote in with a question about deducting losses associated with a home fire:
We had a fire last year. We lost our furniture, my wife’s clothes, etc. We were renting at the time and had no renter’s insurance. The fire department couldn’t determine the cause. Can we deduct any of these losses from our income taxes?
Wow, what a bummer. A loss like that is bad enough even if you do have insurance. The fact that it’s an uninsured loss is just adding insult to injury. The good news for Jimmy and his wife is that they’ll at least get a bit of a tax break to help soften the blow.
According to the IRS (see Topic 515, Publication 547, and Publication 584 for details) is that you can typically deduct casualty and theft losses relating to your home, household items, and vehicles from your Federal taxes.
A “casualty loss” is defined as a loss from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. Note that this does not include normal wear and tear, and that you need to reduce your loss by any amount reimbursed by insurance.
If your property is damaged but not destroyed, then your loss is the lesser of the “adjusted basis” (i.e., your cost plus or minus improvements and depreciation) and the decrease in fair market value of your property due to the casualty.
In addition to reducing the loss by any amount reimbursed by insurance, you also have to reduce it by the salvage value of the damaged property (e.g., if you can sell it for scrap, the amount you could recoup from that sale counts against the total loss).
To claim a casualty or theft loss, you need to file Form 1040 and report it as an itemized deduction on Schedule A (or 1040NR, Schedule A for non-resident aliens). For personal property, you figure the deductible amount by reducing the loss by salvage value and/or insurance payments. You then need to reduce this amount by $100 per casualty or theft event claimed during the year. Add it all up and then subtract 10% of your adjusted gross income (AGI).
The casualty or theft loss itself is reported on Form 4684.
So there you have it… If you suffer a major casualty or theft loss you may get a bit of a break at tax time. That being said, your net loss is only deductible to the extent that it exceeds 10% of your AGI, so this deduction isn’t quite as good as it sounds at first.
Hopefully you’ll never have to use this information, but I thought I’d put it out there just in case.