Suppose your home is burglarized while you’re away. Of course, you have to promptly notify the local authorities and your insurance company. But is that the end of the matter? Not as far as taxes are concerned.
Strategy: Determine if you qualify for a theft loss deduction on your tax return. Personal theft losses are lumped in with personal casualty losses from natural disasters and other events.
Under the basic rules, you’re entitled to a deduction only after you clear two tax hurdles.
- Your annual deduction for personal casualty and theft losses is limited to the excess of total losses above 10% of your adjusted gross income (AGI).
- For this purpose, each separate casualty and theft loss is reduced by $100.
For example, if you lose $12,000 of property in the burglary and your AGI is $100,000, your theft loss deduction is limited to $1,900 ($12,000 – $100 – $10,000).
A theft is defined as the taking and removal of money or property with the intent to deprive the owner of it. It must be illegal under the law of the state where it occurred and done with criminal intent.
The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero. The deductible amount must be reduced by insurance proceeds.
Tip: There are no deduction limits for thefts of business property.