By NEIL DOWNING
The Providence Journal
27-OCT-05
Water in the basement this weekend? Don't look to Uncle Sam to bail you out.
If you suffered damage from the recent series of storms and did not have insurance coverage, you can try to "write it off" by claiming a casualty loss deduction on your federal income-tax return.
But it won't be easy. There are several key hurdles to clear, and they're so high most people probably won't be able to qualify, especially if they have smaller losses, said Robert J. Sclama, who teaches income taxation at Bryant
University's program for financial planners.
Even if you do qualify _ because you have a major loss, for instance _ you'll still face potentially severe restrictions. As a result, any tax benefit will be limited.
Itemize: You cannot claim a loss if you claim the standard deduction instead of itemizing. The standard deduction is generally a lump-sum amount that varies depending on your filing status (whether you're single or married and file a joint return, for instance). About two-thirds of all taxpayers claim the standard deduction.
You may pursue a casualty-loss deduction only if you itemize, said Leon M. Rudman, president of the Massachusetts Society of Enrolled Agents, the state affiliate of the National Association of Enrolled Agents. Itemizing essentially means that you must list all your deductions _ for mortgage interest, property taxes and the like _ separately, on Schedule A of your Form 1040. (You claim the casualty loss on Form 4684, then transfer the figure to Schedule A.)
Calculations: What is a casualty? "A casualty occurs when your property is damaged as a result of a disaster such as a storm, fire, car accident, or similar event," the IRS says in a publication about casualty losses (see "Today's Tip" below).
Even if you itemize, however, you're still not home free. You first must reduce your casualty loss by the amount of any insurance recovery, Sclama said. You then must subtract $100 (a kind of "deductible" for tax purposes). Whatever loss remains must be offset by an amount equal to your adjusted gross income, or AGI.
(Find the figure on the front of your tax return, toward the bottom. It's generally your gross income after certain adjustments _ for alimony paid, moving expenses and the like.)
So, say you suffered a $10,000 loss. After the $100 deductible, you're left with $9,900 to claim. If your adjusted gross income is $100,000, you'd have no loss for tax purposes. That's because 10 percent of your AGI is $10,000, which is greater than the amount of your loss in this example, Sclama said in an interview yesterday at his office in North Providence, where he runs his own financial-planning and tax-consulting business.
For this and other reasons, most small claims "will get lost in the number crunching," Rudman said.
Sclama put it this way: "If there's only several hundred dollars worth of loss, I don't think most people will be able to take it" as a casualty loss on their returns.
What if you suffered a big loss _ say $30,000, and recover $15,000 through insurance? You'd have a "surplus" loss of $15,000. After the $100 deductible, $14,900 would remain.
If your AGI were $50,000, you'd have to reduce your $14,900 loss by $5,000. That would leave you with a $9,900 loss to claim. If you're in the 15-percent federal income-tax bracket, it'd save you about $1,485 in taxes.
Valuing the Loss: Figuring the amount of the loss is itself a complicated process. However, as a rule-of-thumb, most people who qualify for the tax break will wind up using a property's fair market value, said Sclama, former head of the Rhode Island Society of Certified Public Accountants' federal and state tax committee.
So if you paid $500 for a TV set a few years ago, put it in your finished basement, and it was destroyed when water flooded the basement, you won't be able to claim the full $500, Sclama said. Instead, you'd generally have to use only its current fair market value, which might be only half of what you paid, depending on how long you've owned it and other factors, he said.
Furthermore, you'll need paperwork to support your claim, Rudman said. "You've got to have that information in an audit to justify" the amount of your deduction, Rudman said in a telephone interview from his office in Stoughton, Mass., where he runs his own tax practice.
If you think you might be eligible to claim the loss, you'll probably end up doing it on your federal income-tax return for 2005. (If you live in an area that's declared a presidential disaster area, however, you'll have a choice:
claim it on 2004, by filing an amended return, or claim it on your 2005 return, whichever would benefit you more.)
TODAY'S TIP: Claiming a casualty loss is a complicated business, including lots of rules and other details too numerous to list here. For more information, see IRS Publication 547, "Casualties, Disasters and Thefts." (It also includes information about losses for businesses, where different rules apply.) There's also Publication 584, "Casualty, Disaster, and Theft Loss Workbook."
For your free copy, visit your local IRS office or call the agency toll-free at 1-800-829-3676. Both publications are also available for download at no charge from this IRS Web site: www.irs.gov/formspubs
(Neil Downing is the author of "The New IRAs and How to Make Them Work for You." E-mail questions to moneyline@projo.com or leave a message at 401-277-7484. No personal replies, but as many questions as possible will appear here.)
(Distributed by Scripps Howard News Service, http://www.shns.com.)
