by Jeff Reeves | February 21, 2013 10:23 am
Mother Nature has been on a mean streak in the last few months. Parts of Connecticut just got several feet of snow, Hurricane Sandy swamped Manhattan a few months back and tornadoes continue to batter the Midwest and South with disturbing regularity.
Obviously, when disaster strikes, there are more important things to worry about than how to lighten your tax burden. But as the April 15 tax deadline approaches, it’s worth noting that the IRS is sympathetic to Americans who suffered big losses in the last year.
That goes for bad weather, but also man-made catastrophes including theft or fire.
Remember, while the tax code is convoluted and the Internal Revenue Service is seen by some as a pickpocket, there are many provisions that give certain Americans a leg-up when they need one. Deductions for disaster damage to homes, cars and other property are a perfect example.
The tax break for losses isn’t a cakewalk, however. There are three important hurdles to get over before you should even consider asking for a tax break on your losses.
Insured Losses Don’t Count: It’s not logical for Allstate or State Farm to pay you and then for the government to pay you, too; if you’re covered then you don’t get a tax break. Similarly, partial coverage only means a partial tax benefit. So be honest with the tax man about your actual losses and what you’ve been reimbursed for by private insurance.
Over $100: If you do itemize, you have to forgo the first $100 in value. In other words, if it’s a cheap necklace that got snatched, don’t even bother mentioning it.
Itemizers Only: You must itemize your returns to get any benefit even if these first two standards are met. The standard deduction of $5,950 for single individuals or couples filing jointly makes the loss threshold pretty high, then.
Typically, these rules mean tax write-offs include vehicles or residences that have been damaged or destroyed. It’s not uncommon to shoulder an out-of-pocket loss that ranks in the thousands of dollars on cars and homes — and the IRS is sympathetic to that.
If you have a qualified loss, however, there is still some math that needs to be done. You can’t just tell the tax man how much you paid for your car or house; you have to state what your losses were, which can often be much different.
This includes steps such as determining “fair market value,” which is what the property is actually worth … not just what you paid. Also, if the item was damaged in a flood or fire, you must account for the “salvage value” of the remaining property. This is designed to avoid you claiming a total loss then selling a few of the choice parts for an extra profit.
In fact, the Internal Revenue Service has a whole workbook to help you calculate the value of your losses — Publication 584, available on IRS.gov — that should be reviewed in careful detail before you pursue breaks for casualty, disaster or theft losses.
And one final note, which should go without saying: Burning down your house or letting a pal run off with your flat-screen does not make your “losses” tax deductible.
While property losses due to hardship are no fun, tax fraud and insurance fraud are serious business, too.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.
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