Mother Nature has been on a mean streak in the last few months. Parts of Connecticut just got three 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 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.
• It must be 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 nicked, don't even bother mentioning it.
• For use by only those who itemize. You must itemize deductions on your returns to get any benefit even if those first two standards are met. The standard deduction of $5,950 for single individuals or $11,900 for couples filing jointly makes the loss threshold pretty high if you don't have other deductions to itemize.
These rules mean that typical tax write-offs would 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 home; you have to state what your losses were, which can often be very different.
This includes steps such as determining "fair market value," which is what the property is actually worth and not just what you paid. Also important if the item was damaged in a flood or fire is to 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 IRS has a whole workbook to help you calculate the value of your losses – Publication 584: Casualty, Disaster, Theft Loss Workbook, available on IRS.gov – that should be reviewed in 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 TV does not make your "loss" tax-deductible.
While property losses due to hardship are no fun, tax fraud and insurance fraud are serious business, too.