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April 5, 2007
COMPLETELY AND TOTALLY PERSONALLY VIOLATED
Have you ever been robbed? Have you ever had your personal property lost or destroyed by no fault of your own? Perhaps you were a victim of the massive flooding that took place last spring. Then, you too have probably experienced the feeling of being completely and totally personally violated.
On a recent trip to St. Croix in the US Virgin Islands, our room was robbed, and all of my daughter’s jewelry was taken. Because there had not been a forced entry, I assumed that one of the cleaning staff had helped themselves to our property. Because we had not used the room safe, the hotel was not sympathetic. The lesson learned was to place any item in the safe, that if stolen, would cause you grief.
I don’t mean to lament about our bad fortune, but wish to expose the options available to all of us to help alleviate our losses. The two most common methods of recouping your losses are to make a claim on your insurance or to claim a loss on your income tax return. In my case, the theft of jewelry while on vacation is covered but is subject to a $500 deductible.
If insurance will not reimburse you for any of your loss, there’s always Uncle Sam. The Internal Revenue Code contains provisions that will allow a deduction for something known as a casualty loss. A casualty loss is one that is sudden, unexpected or unusual. Damage from floods and storms are considered casualty losses.
If you were a victim of last spring’s flooding or had some other casualty, there are three amounts necessary to compute your income tax deduction:
1) The cost of the stolen or damaged property,
2) The decrease in the fair market value of the property, and
3) Insurance or other reimbursement you received or expect to receive.
For flood victims, you need to calculate the cost for that portion of the property that was damaged, and compare that to the decrease in the fair market value of the property due to the flood. Unfortunately, neither of these amounts is easily determined. If the loss is large we generally recommend an appraiser to determine the decrease in the FMV of the property. From the smaller of these two amounts you must subtract any insurance recovery. The result is your casualty loss amount.
The final hurdle before taking the loss as a tax deduction is that you must not only reduce the loss amount by a $100 deductible, but also by 10% of your adjusted gross income. Here’s an example:
Example: Last spring, Bob and Alice’s home was damaged by localized flooding. They purchased their home for $150,000 several years ago and feel that one-third of it was damaged by the flood ($150,000/3=$50,000 loss). They hired an appraiser who determined that their home would now be worth $300,000, but due to the flood it is only worth $200,000. They did not have insurance but did receive $10,000 from the federal government. Their adjusted gross income is $50,000.
Their loss of $50,000, based upon their cost, must be reduced by the $10,000 received from the federal government and then reduced by a $100 deductible. This amounts to $39,900 and must be further reduced by $5,000 (10% of their adjusted gross income), leaving them with a tax deduction of $34,500.
If you have already filed your tax return and did not take advantage of claiming your loss, don’t worry. You have 3 years to go back and amend your return to claim this or any other deduction that you may have omitted. If you have not filed yet, and are still working on getting the information necessary to claim the loss, you may consider filing for an automatic 6 month extension on IRS form 4868. Just remember that these extensions are extensions of time to file and not to pay. If you will owe taxes, you must send in the money with the extension form.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org