Did you know that the tax code allows you to claim tax deductions for household damage caused by thefts, vandalism, fires, floods, hurricanes and others kinds of casualties? But the law imposes several restrictions.
Relief is available only for uninsured losses. They must be reduced by any settlements you receive, or expect to receive, from your home owner's or renter's insurance. Nor do you get any write-off for the first $100 of each theft or casualty loss.
The major limitation is that total losses generally are allowable only to the extent they exceed ten percent of adjusted gross income, the amount listed on the last line of the first page of the 1040 form.
There are other problems for people with hefty deductions that surpass the ten-percent threshold. IRS sleuths learned long ago that most of them are unable to substantiate their losses because they neglect to keep adequate records. They have to rely on what, at best, are estimates. This is assuming they are even able to recall, for instance, all those valuable and not-so-valuable belongings stored in their closets. So the ritual response of the feds is to throw out or trim unsupported estimates, a strict approach that has been sustained by the courts in countless decisions. Take, for example, a case in which an unsympathetic United States Tax Court emphasized that it "bears heavily" against taxpayers who base their estimates mostly on recollections, not records.
Nevertheless, an understanding IRS wants to ease the burden for people who fall victim to thefts, casualties, or disasters. The agency offers a free guide, Publication 2194, Disaster Losses Kit For Individuals, available at www.irs.gov/pub/irs-pdf/p2194.pdf. Or you can call a toll-free number, 800-TAX-FORM (829-3676).
(As long as you're making the call, also get Publication 910, Guide to Free Tax Services. It supplies a complete list of IRS booklets, summarizes what they cover, identifies the many materials and services available, and explains how, when, and where to get them. To order current and prior year publications or forms, use the toll-free number.)
Publication 2194 includes a handy workbook with schedules for listing, among other things, clothing, jewelry and a residence's contents on a room-by-room basis. Schedules for rooms and other areas have separate worksheets for the entrance hall, living room, dining room, kitchen, bedrooms, garage, and other sections. Each worksheet lists belongings generally found in a specific area.
As an example, the entrance-hall worksheet lists chairs, clocks, draperies, lamps, mirrors, pictures, rugs, tables, umbrella stands and wall fixtures, with plenty of space to enter additional items. Alongside each property item are seven columns in which to record the following details: the number of items; date acquired; cost; value before the loss; value after the loss; decrease in value; and amount deductible as a loss.
You may never need to calculate deductions for casualty or theft losses, but 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 the adequacy of your insurance coverage, file insurance claims, plan to move -- or even create a household inventory for heirs.
To be sure, it's a disheartening project to list all your possessions, their cost and other information. Still, creating a list in advance is incomparably easier than trying to remember all those details after property is stolen or destroyed. Whether the inventory is a first time task or an update, it's prudent to keep a copy outside your home in a safe deposit box or some other secure location.
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Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as "a leading tax professional" (New York Times), "an accomplished writer on taxes" (Wall Street Journal) and "an authority on tax planning" (Financial Planning Magazine). His books include Julian Block's Home Seller's Guide to Tax Saving.