Written Record
If you keep a detailed list of personal property it will be easier to claim a deduction on your taxes in the event of casualty or theft losses. In addition, you will need this detailed information to file with your insurance company.
Losses can come about because of burglaries and vandalism. In addition, losses from fires, floods, tornados, terrorist attacks and tsunamis more than meet the criteria.
Unfortunately, the IRS imposes several convoluted restrictions on the allowable amounts for theft and casualty losses. Moreover it knows that many taxpayers misunderstand the complex rules and overstate their deductions.
IRS examiners learned long ago that most people are unable to substantiate their loss deductions because they neglected to keep adequate records. So, the usual response of the Feds is to throw out or trim unsupported estimates. This is a strict approach that has been sustained by the courts in countless decisions.
The IRS agency offers a free guide, Publication 2194, Disaster Losses Kit for Individuals, available at www.irs.gov or (800) TAX-FORM (829-3676).Publication 2194 includes a handy workbook with schedules for listing clothing, jewelry and a residence’s contents on a room-by-room basis. Schedules for rooms have separates sheets for the entrance hall, living room, dining room, kitchen, bedrooms, garage and other sections.
Alongside each property item are seven columns in which to record details: the number of items; date acquired; cost; loss; decrease in value; and amount deductible as a loss.
Publication 2194’s workbook will help you inventory household goods and personal property. That list can prove indispensable when, for instance, you want to reconsider inadequacy of your insurance coverage, file insurance claims, plan to move – or even create a household inventory for heirs.
Still, creating a list in advance is incomparably easier than trying to remember all those details after property is stolen or destroyed. It is prudent to keep a copy outside the home in a secure location.
Following are highlights of some of the confusing restrictions on who can claim casualty and theft losses and what and how much is allowable.
File claims and account for settlements. The IRS requires itemizers to reduce their losses by insurance settlements or other reimbursements they received or expect to receive. They also may not receive deductions if they fail to file claims.
Subtract $100 per loss. The IRS usually mandates another subtraction of $100 for each loss. But it orders only one $100 reduction when the same event damages several items, say, the same flood damages a person’s home and detached garage or a year-round home and a summer cottage.
Make sure losses exceed 10% of AGI. The big hurdle is that losses are deductible only to the extent that their total exceeds 10% of adjusted gross income. AGI is gross income reduced by specific outlays, such as alimony payments and contributions to retirement plans, and before itemizing or using the standard deduction and claiming dependency exemptions.
Claim losses in the year they are discovered. Casualty and theft losses can be claimed only on the 1040 for the year in which casualties occurred or thefts are discovered.
MORE COMPLEX CASES
Wait, it gets more complicated. The IRS routinely requires you to prove that deductions take into account what missing or damaged items originally cost and what they were worth before and after the incident. In the case of theft, count the value of stolen property as zero.
Do the listing now. In addition, take photos and/or videos to further back up your claim. Remember, the insurance company will demand you “prove” to them that you owned it.