Casualty Losses and Income Limitations

Storms, floods, car accidents, and thefts happen, and more often than not, insurance does not cover the total amount of the stolen or damaged property.  As a result, the government allows a taxpayer a casualty or theft deduction on the individual’s income tax return in order to help alleviate some of the financial burden that is associated with these events.  However, the deduction is not simply the value of the ruined or stolen property. 

In order to properly claim a casualty loss, the following information regarding the event needs to be reported:

· A description of the property including location and date acquired,

· The property’s basis (which is often the original purchase price),

· The fair market value of the asset, if known, both before and after the accident,

· And any amount of reimbursement received.

The casualty or theft loss is considered the lesser of the basis of property reduced by any reimbursement received or the decrease in fair market value due to the casualty or theft.  This amount, however, is further reduced before it becomes a deductible amount.  First, each loss suffered during the year is decreased by $100.  Then the loss is additionally reduced by 10% of the taxpayer’s adjusted gross income, which is calculated on page one of the individual’s tax return.  Once the deductible amount is calculated, it can not be further decreased by the phase-out rules that reduce an individual’s itemized deductions.

The Tax Extenders and AMT Relief Act of 2008 added an additional benefit to such losses.  For the 2008 and 2009 tax years, personal casualty losses that have been incurred as a result of a federally declared disaster the 10% of adjusted gross income limitation has been waived.  Additionally, casualty losses are not only thefts, storms, car accidents, but they are also one of the possible ways in which an individual can deduct losses on deposits in insolvent or bankrupt financial institutions.