The IRS offers many ways to claim credits and deductions from tax returns. One such deduction can be taken by filing IRS Form 4684 to report losses from disasters, some investment schemes, theft, and other damages. In order to qualify for this deduction, the losses have to be sudden and unexpected. This means that the taxpayer cannot have been the cause of the loss due to either neglect or willful intent. The types of casualties can range from natural disasters such as earthquakes, eruptions or hurricanes to sonic booms and cave-ins. Thefts include burglary, embezzlement, extortion, ransoms, blackmail, larceny and robbery. As long as the property, such as a car, or money was not misplaced by the taxpayer, it is eligible for inclusion in the form.
The other type of losses that can be included when filing IRS Form 4684 are losses from deposits due to insolvent or bankrupt financial institutions, losses from Ponzi-type schemes, and gains from property loss. Property loss gains occur when money received is more than what was lost. Federal aid and insurance payouts may be more than enough to replace the property lost, resulting in a “gain”. If the loss of property includes the taxpayer’s main home, they can exclude up to $250,000 of the gain or $500,000 if filing jointly. Amounts over those amounts can be reported the next year. Reimbursements that fall short of the value of the house may be frustrating. However, the difference in the amount received and the actual value can be used to calculate a deduction on a taxpayer’s return.
There are general rules that taxpayers must apply to their calculations in order to correctly figure their deductions. For personal-use property, the loss must first be reduced by $100. The amount must then be reduced by 10% of the taxpayer’s Adjusted Gross Income. For business losses, the amount must be reduced by 2% of one’s AGI. IRS Form 4684 also asks for the Fair Market Value of all property that is submitted for a loss. This included before and after the loss event. For more information regarding how and when to take deductions or claim gains, contact a professional tax company or consult with a tax expert.