The Case of the Missing Mums – Casualty and Theft Losses Revisited

One pleasant afternoon recently, my wife looked outside and noticed that one of the mums we had planted was lying in the middle of the lawn.  On further investigation, we discovered that someone had dug out two of our mums.  The thief ran off with one and left the other one in our yard.  The thief is now enjoying a $4 Wal-Mart mum.  What about me?  Are there any tax breaks available for this theft?Obviously $4 is too little of a loss to deduct, but for more substantial theft losses (like if someone ransacks your home) you might be able to take a “casualty and theft” tax deduction.  For purposes of this example, let’s say your household income is $500,000, and you own the world’s most expensive TV, which, according to this article, costs $113,000.  Someone breaks into your home and steals the TV.

Step 1
The first step is to determine the amount of the loss.  Generally, you look at the value of the property before and after the loss event.  The change in value before and after the event is the number you use for the calculation.  (NOTE:  This is the Cliff’s Notes version for determining the loss.  As with anything relating to taxes, there are exceptions and special circumstances.)

For stolen property, the “after” fair-market value is considered to be $0, so the amount of the loss in our example is $113,000 ($113,000 “before-theft” value minus $0 “after-theft” value).

Step 2
Next, we reduce the loss by $100.  In our example, we are left with $112,900.

Step 3
Unfortunately, we aren’t finished.  The last step is to reduce the remaining loss by 10% of your income.  In our example, 10% of $500,000 is $50,000, so we take $112,900 minus $50,000, leaving us with $62,900.  This is the amount we can deduct on our tax return as a casualty and theft loss.

As you can see, Step 2 eliminates a deduction for small things.  And Step 3 puts further limitations on what you can deduct, because the higher your income is, the greater the reduction in your deduction.

Similar Dinesen Tax Times Article:  Deducting Flood Losses and Other Storm Damage.