September 19, 2014

Losing your property through theft or catastrophe is tough. If your losses were extensive, you may wonder if you will ever recover.

While nothing can completely negate the effects of a natural disaster or theft, you may be able to get some relief from Uncle Sam. Even if your losses are greater than your income for the year, you might still qualify for a tax break.

Determining Your Loss

During the past year a hurricane or tornado blew through your town and pretty much leveled everything. Fortunately you and your family were all right, but you lost everything. And you have insurance, but your policy only covers the fair market value of your items.

The fair market value means you’ll only get the depreciated value of your items rather than what you paid for them, or what you would have to pay to replace them with new items.

In this case, it would be unlikely that you would qualify for an additional tax deduction. The IRS only allows deductions that equal the value of your items at the time that they were stolen or destroyed rather than the replacement value for new items. (IRS.gov)

But if you had no insurance, or if your insurance carried a very high deductible, then you most likely would qualify for a tax deduction. Likewise, if your car was stolen or your house was burglarized and your family’s heirloom jewelry was stolen, you would likely qualify if you were not otherwise compensated for your loss.

Calculating Your Deduction

Once you have calculated the fair market value of your lost or stolen items, less any reimbursement you may have received from your insurance company, your work is not done.

You must deduct $100 from the total amount of your losses for each incident of catastrophe or theft. For instance, if your house suffered major damage from a tornado and your car was stolen during the same calendar year, you would subtract $100 for each incident from amount of your losses for a total of $200.

To claim a tax deduction for theft or catastrophic loss, you must itemize rather than taking the standard deduction. This means completing a separate Form 4684 for each incident of theft or catastrophic loss and entering the appropriate total amount on Schedule A, which you would then file with your federal income tax return.

Even then, you will only be able to claim the amount of your losses that exceed 10 percent of you adjusted gross income for the year. As you can see, your losses would truly have to be substantial to qualify for the deduction.

Net Operating Losses (NOL)

If your losses from a natural disaster were truly catastrophic, or if a burglar cleaned out your entire house, it is conceivable that your losses could actually exceed your income. In such cases, you would record a Net Operating Loss (NOL) for the year. Under ordinary circumstances, reporting an NOL is limited to earnings from business or self employment. But this limitation is waived for losses that occur due to a casualty such as a natural disaster.

Any NOL that you have would first apply to the tax year in which your losses occurred. Any amount that exceeds your taxable income for the year can be carried forward or carried backward to reduce your taxable income for past or future years. NOLs resulting from natural disasters can be applied up to three years prior to the present tax year and up to 20 years forward from the current tax year. (IRS.gov)

Getting Back What You Have Lost

Properly calculating your losses from a natural disaster or theft can be complex. If you have questions, consult with a tax professional. Our experts at Optima Tax Relief can make sure that you receive the largest deduction to which you are entitled.