Casualty Loss Deduction – Special Cases

In two previous posts I discussed theft loss and casualty loss, which combine together like Voltron for your Theft and Casualty Loss Deduction on a tax return. Since this is a complicated topic (what tax topic isn’t?), we still have a few more random items to discuss before we’re all the way through.

Loss on Bank Deposits

Remember the bank run scene in “It’s A Wonderful Life?” As long as you’re in a FDIC insured bank, nothing like that should happen again in the foreseeable future. But let’s just say that somehow your bank deposit was lost. It could happen, as people who deposited their fortunes into Mt. Gox are painfully aware. What happens next?

Despite being a nonbusiness transaction, the IRS does give you some sort of deduction. The rules state that such bank deposit losses can be considered a theft loss IF YOU WANT THEM TO. Just like a theft loss, you’d deduct $100 from the total amount of the loss, then deduct the remainder subject to the Theft Loss Rules covered in my previous post.

Remember that any losses must be reduced by insurance proceeds, including the FDIC insurance proceeds.

There are actually two other ways to handle the loss on bank deposits, which I’ll just briefly cover. The first is instead of treating it as a theft loss, you can report it as a miscellaneous loss on your Schedule A. Then, instead of a 10% AGI comparison, it’d only be 2% of AGI. Just make sure to note the name of the financial institution and “Insolvent Financial Institution” on the Schedule A. The downside of this method is that it’s limited ($20,000 per financial institution, last I checked).

Finally, you can report it on the Form 8949 as a short-term capital loss.

Each option has it’s own pros and cons. If you’d like to know more, feel free to ask.

Ponzi Schemes

Another Bernie Madoff just made off with a ton of money, including some of yours included. What do you do?

Other than cast him as the bad guy of a comic book, of course

Other than cast him as the bad guy of a comic book, of course

While it is entitled to a theft loss, the limitations of the theft loss are removed. That means no $100 floor, and it’s not reduced by 10% of your income. I can’t say that’s great news in light of some douche running of with your money, but it’s better than the regular theft loss rules.

In addition, if having this loss makes your return negative (known as a Net Operation Loss in the tax world), you’re allowed to carry the loss to offset income on another return.

For more about how to take an Net Operating Loss, I’ve written about it recently.

Federal Disaster Areas

If your casualty loss occurred the disaster area of a federally declared disaster, you can claim your casualty loss in the previous year. For example, if the disaster occurred in 2015, you go could back and amend your 2014 tax return to claim the disaster in that year.

Doing so potentially helps you get a quicker refund, meaning more cash in your pocket to help with your loss.

All the other Casualty Loss rules apply, except when you’re comparing the loss to 10% of your AGI, you’d compare it to the prior year AGI (i.e. you’re amending your 2014 tax return, so you’d look at your 2014 AGI).