Your Tax Question - 048

Dear John, Earlier this year my house was robbed and many thousands of dollars of valuables were taken and never recovered. My insurance company paid a very small portion but nowhere near what the value was for the items taken. What are the tax rules about losses? Thank you, Ken

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Hi Ken,

I am sorry that your house was robbed and that you have had to go through that ordeal.

Generally congress does not allow losses on anything but business assets but they do allow individuals to claim losses in the case of robbery. The loss is not allowed in the year of the incident if there is a chance at future recovery either of the property or an insurance claim. After that, there is a formula for figuring your loss, it reduces your actual loss but if it was large enough (and your income low enough) then it may be worth figuring.

Let me explain this with an example. Let's say that it has been determined that there is no chance at recovery of your property and your insurance company has already cut you a check. It has been determined, by your insurance adjuster, that your stolen property had an actual value of $10,000 even though you paid $30,000 for it. The rules state that you are allowed the lesser of the basis (amount you paid) OR the adjusted value (what the insurance guy says it's worth) as your loss.

But wait, the $10k still has to be reduced. The $10k has to be reduced by the amount of your insurance adjustment (let's say $2,000) so now you have an $8,000 loss. Plus, you have to reduce the loss by $100 per incident (for 2010) which takes the loss to $7,900. After these adjustments you will then have to reduce it by 10% of your $50,000 AGI - $5,000. You now have a $4,900 loss that you are allowed to deduct on your Schedule A.

That is the way the theft loss works, the actual facts of your particular case need to applied to these rules. Should you need a tax guy to work it out for you just give me a call I am always happy for another client.

Best wishes,

John