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Deducting Your Casualty Losses at Tax Time: Don’t Mistake the IRS for an Insurance Provider

2014-03-13
By: Advocate Brokerage

Deducting Your Casualty

By Rosalyn Binday

 Did you have a loss last year due to weather, theft or an accident?

Are you planning to deduct that loss when you file your Federal Income Tax return?

Well, it might not be so easy.  In fact, the IRS sets a pretty high bar for a tax deduction due to a casualty loss.  It’s a good reason to make sure your insurance is up to date and covers what you need it to.

The biggest hurdle is the 10 Percent Rule, which means that any unreimbursed losses you incur during a given year must exceed 10 percent of your adjusted gross income (AGI) to be deductible on your tax return.  To add insult to injury, the IRS tells you to knock off another $100 from each incident when you’re trying to reach the 10 percent.

So, suppose you have an AGI of $100,000 for the year.  Your losses would have to total $10,000 before you can deduct anything, and then you can deduct only the amount above $10,000.

Homeowners’ and auto policies cover most losses with a much lower deductible – say $500 or $1,000 if you have an at-fault collision, or $250-$500 for a fire in your home. After that, the insurance pays up, and your loss is contained at a manageable level.

Maybe, however, you gave your son your 3-year-old car and took the collision coverage off it to keep the insurance premium low.  If that gently-aged Mercedes or Lexus has a current market value of $12,600, you would first subtract $100 according to IRS instructions, and then take off 10 percent of your AGI, or $10,000. You can deduct the remaining $2,500.  Your marginal tax rate at $100k is 25 percent if you are married or head of household, so your tax savings after declaring the loss is $625.

Likewise, if perhaps you lack flood insurance and the spring rains cause the brook in your backyard to pour into your basement. Your $15,000 worth of family room furniture, 60-inch flat screen, sports equipment, car parts and overflow food supplies from the pantry would turn into a $4,900 deduction when you itemize your taxes, and your net tax benefit is $1,225.

Of course, those amounts you save on your 1040 won’t come close to replacing what you have lost, and you’re out of pocket for the rest.  That’s the reason why most people opt for a reasonable balance in choosing a policy and how much you have to lose before coverage is triggered.  If you had a $500 collision deductible on the second car, you’d get $12,100 from the insurance company toward replacing it.

There are additional IRS guidelines for certain losses, some of which ease the burden if your area is declared a federal disaster area.  But in general, the government does not want to absorb the burden of your loss when insurance is available to mitigate the damages.

At Advocate Brokerage we’re always working with you to make sure your assets are covered appropriately, and to keep any potential losses from hurting you deep in the pocketbook.

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