Generally, you may claim an itemized deduction for any casualty and theft losses you suffered, but you must first determine the amount of the loss, and then figure the amount of the deduction.

Determining the amount of the loss

To determine the amount of loss you need to do two calculations:

• You first must calculate the adjusted basis of your property. The adjusted basis is usually the original cost of the property plus the cost of improvements, minus depreciation, and any previous casualty losses claimed.
• You must then calculate the decrease in fair market value of the property caused by the casualty or theft.

The smaller of these two calculations (adjusted basis or the decrease in fair market value) is the amount of your loss. From this amount, you must subtract any insurance settlement or reimbursement you receive or expect to receive.

The decrease in fair market value is the difference between the value of the property immediately before, and immediately after the casualty or theft occurred. To figure the decrease in fair market value, you generally will need to have an appraisal done. You can however, use the cost of clean-up and repairs to measure the decrease in fair market value if:

• The repairs were necessary to bring the property back to its original condition before the casualty.
• The amount spent for the repairs is not excessive.
• The repairs were done only to take care of the damage caused by the casualty.
• The repairs do not increase the value of the property to more than its value before the casualty.

Figuring the Deduction

You can deduct a theft loss only in the year you discover the theft, and a casualty loss only in the year the casualty occurs, but you must first figure your allowable deduction for the year.

Casualty and theft losses cannot be deducted in full. In figuring your allowable deduction, you must first reduce your losses by any salvage value and any insurance or other reimbursement. After this, there are two other reductions that must be made to the losses before you can take the deductions. These are as follows:

• You must reduce each casualty or theft caused by a single event by $100 (the $100 rule).
• You must reduce the total of all your losses (that is, after reducing each by $100) by 10% of your adjusted gross income (the 10% rule).

For example, you have AGI of $20,000 and you suffered loss of $5,000 to your property, caused by a fire. You must first of all reduce the $5,000 loss by $100, which will leave you with $4,900. You must further reduce the $4,900 by $2,000 (10% of $20,000). Your deduction on Schedule A would then be $2,900.

You must use section A of Form 4684, Casualties and Thefts, to figure your deduction for a casualty or theft loss of personal-use property. In completing Form 4684, you must follow the following procedure:

• Determine the amount of the loss. As mentioned above, the amount of your loss is the SMALLER of: (a) the decrease in fair market value after the casualty/theft, or (b) the adjusted basis (cost) of the property before the casualty/theft.
• Reduce the loss, regardless of whether it is a casualty or theft loss, by any salvage value, and by any insurance or other reimbursement you receive or expect to receive.
• Apply the $100 reduction to each individual loss.
• Use a separate Form 4684 to figure the loss amount for each casualty or theft event.
• Combine all your individual losses on one Form 4684, and reduce the combined amount by 10% of your adjusted gross income.
• File all Forms 4684 with your tax return.

The primary objective of this article is to empower taxpayers to learn to do their own taxes. For detailed information on how to deduct casualty and theft losses, grab yourself a copy of “Doing Your Own Taxes is as Easy as 1, 2, 3” ($6.98) on TaxConnections.com