 Income tax 2023-2024, itemized deductions, casualty and theft losses. Get ready and some coffee so we can do some tax interpretations with income tax preparation 2023-2024. Most of this information can be found in the Instructions for Schedule A Tax Year 2023 which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula we're focused on what I would call the below the line deductions. Remember in the first half of the income tax formula is in essence a funny income statement. Most income statements having income minus expenses resulting in net income. Here having income minus various deductions resulting in taxable income. Remembering that deductions for taxes are good therefore we're typically looking for more of them and the difference between the types of deductions are that the above the line deductions or the adjustments to income do not need to clear a hurdle in order to get a benefit from them whereas the itemized deductions typically do need to clear the hurdle of the standard deduction before the taxpayer gets a benefit from the itemized deductions. Looking on the first page of the form 1040 we're at line number 12 taking the greater of the standard deduction or itemized deduction. The itemized deduction then being reported on Schedule A. The Schedule A itemized deductions has the list of the major categories of itemized deductions on the left-hand side although this is only the part of that form or schedule. Noting that to clear the standard deduction we need to know what the standard deduction is which is tied intimately to filing status. For single filers the standard deduction 13, 8, 50 double that for married 27,700 in the middle for head of household 20,800 and if over the age limit and or blind we have increases for single one or two of those two categories. Standard deduction on the right married filing joint has four possible different categories two people each having two categories and the increase on the standard deduction on the right. So now we're thinking about casualty and theft losses remembering that for an income tax system the natural type of deduction would typically be those things you needed to expand in order to generate revenue which can most clearly and easily be seen in a Schedule C type situation for a business where we have the business expenses an income statement in essence income minus expenses result in the net income and we tax people on the net income. When we think about most tax returns however they have W2 income and therefore we don't have those normal expenses because we assume that the employer is the one paying for those normal type of expenses. The expenses we often think about on the Schedule A are somewhat unusual for a normal income tax system where you would think the government is just trying to collect taxes in the most fair way possible to pay for things like the military the Schedule A in contrast is used to add other things. First a word from our sponsor. Yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but that's okay whatever because our merchandise is better than their stupid stuff anyways. Like this CPA thinking cap for example CPA thinking CAP you see what we did with like with the letters and this CPA thinking cap is not just for CPAs either anyone can and should have at least one possibly multiple CPA thinking caps. Why? Because based on our scientific survey of five people all of whom directly profit from the sale of these CPA thinking caps wearing this CPA thinking cap without a doubt according to the survey increases accounting productivity tenfold yeah at least yeah apparently the hat actually channels like accounting energy from the quantum field ether directly into your head allowing you to navigate spreadsheets faster it's kind of like how in like the matrix when Neo learns kung fu or at least that's what the scientific survey is saying so get one because the scientific survey participants could really use some extra cash if you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com that are trying to nudge us incentivize us change our behavior in some way shape or form as we saw with interest where it might incentivize the purchase of housing charitable contributions obviously to incentivize putting money into the organizations that the government has deemed worthy by giving them the charitable status and now we have the casualty and theft losses. Okay so line 15 now obviously casualty and theft losses you can imagine a wide category of things that you can imagine might fit into that section and over time the amount of things that can fit into a casualty or theft loss has kind of increased and decreased you can imagine that if you allow more types of things for casualty and theft it's a potential area for abuse in the tax code and the fact that it's on the schedule a already limits it to most normal people that are going to be taking the standard deduction and not able to itemize so if you allow casualty and theft losses then it might not benefit those people that don't own a home because they don't have the standard the itemized deductions because they don't have the primary things that kick them over to itemizing which is the mortgage interest typically and the taxes on the real estate taxes so then they have also limited greatly the deductibility of things like casualty and theft losses as well as we've seen kind of more recently so this is an area where the tax code like many areas fluctuates over time so we complete and attach form 4684 to figure the amount of your loss only enter the amount from form 4684 line 18 on line 15 so obviously we can look at the instructions for form 4684 for some more detail their caution you don't enter a net qualified disaster loss from form 4684 line 15 on line 15 instead enter that amount if any on line 16 see line 16 later for information about reporting a net qualified disaster loss so that we're going to get quite specific on basically the type of loss and there could be some losses you'll that if you're able to get a deduction for although it's on the schedule a where we might be able to get a tax benefit from it even if you're taking the standard deduction which is something that you would see just logically would kind of make sense if you're trying to get a benefit to everyone for certain types of losses such as certain types of disaster losses for example so you can only deduct personal casualty and theft losses attributable to a federally declared disaster to the extent that so we're severely restricted here so that the rules used to be wider than this so if you have questions and people are asking you about this they probably have in mind rules that were in place prior to the adjustments they have been severely limited now so we're talking federally declared disaster to the extent that one the amount of each separate casualty or theft loss is more than $100 and to the total amount of all losses during the year reduced by the $100 limit discussed in one is more than 10% of the amount on form 1040 or 1040 SR line 11 that $100 limit has been in the code for a long time I believe and it's one of those kind of dollar amounts that they haven't just like kind of removed so it seems somewhat low somewhat irrelevant right now but it's still just there and so we have that in place and the tax software helps us to make sure that we pick that you know qualifier up generally to help us out with the calculation and then we have the 10% amount on form 1040 or 1040 SR line 11 and so we're talking here typically about the income thresholds and usually that's going to be calculated on the adjusted gross income so to then says the total amount of all losses during the year reduced by the $100 limit in one is more than 10% of the amount on form 1040 or 1040 SR line 11 alright so now we're going to be moving to the instructions for form 4684 the casualties and theft for 2023 tax year definitions three types of casualty losses are described in these instructions number one you've got the federal declared we got the federal casualty losses number two disaster losses number three qualified disaster losses so we want to keep the categories straight here all three types of losses referred to federally declared disasters but the requirements for each loss vary so remember we have to have the federally declared disaster possibly for us to be allowed to pull that into the schedule a as we saw before but now we have these three different categories a federally declared disaster is a disaster determined by the president of the United States to warrant assistance by the federal government under under the Robert T. Stafford disaster relief of emergency assistance acts the Stafford Act so obviously we were subject to determined by the president so obviously you know if China paid the president to not just to do so a federally declared disaster includes a a major disaster declaration or be an emergency declaration under the Stafford Act so federal casualty losses a federal casualty loss is an individual's casualty or theft loss of a personal use property that is attributable to a federally declared disaster the casualty loss must occur in a state receiving a federal disaster declaration so clearly they will have the declaration will be able to know that the tax software will help with that because the tax software will typically be able to track these declarations helping you to do the population of the tax returns oftentimes these types of losses are going to be well known to a particular area and therefore if you're doing tax preparation that's around a particular area and there's some kind of federal disaster then clearly you want to have that in mind as part of your questionnaire type of scenario and system so if you suffered a casualty casualty loss you are eligible to claim a casualty loss deduction if you've suffered a casualty or theft loss of purpose personal use property that was not attributable to a federally declared disaster it is not a federal casualty loss and you may not claim a casualty loss deduction unless the exception applies so see the caution under losses you can deduct later so disaster losses a disaster loss is a loss that is attributable to a federally declared disaster and that occurred in an area eligible for assistance pursuant to the presidential declaration which of course he gets his instructions from China at this point just kidding so the disaster loss must occur in a county eligible for public or individual assistance or both disaster losses are not limited to individual personal use property and may be claimed for individual business or income producing property and by corporations as corporations and partnerships so clearly if there's a disaster that happened then a relevant question that would come up is was it a personal item like the house for example or is there a business related item like an office that is subject to the loss and that could have implications in terms of where you're going to be recording the losses if it was an S corporation for example or a corporation or a partnership versus a personal home so if you suffered a disaster loss you are eligible to claim a casualty loss deduction and to elect to claim the loss in a proceeding tax year so does a C disaster loss later now notice that last bit and to elect to claim the loss in the proceeding tax year so you might then have to determine or have the eligibility to determine when you want to be basically taking the loss what year would you be taking the loss in and that could have a significant impact because note that if you're in an area that was subject to a loss that could have a significant impact on your income producing capacity so if for example you make 100,000 a year typically but then your house drifted out into the ocean or something because of some kind of disaster it's likely that you're not going to make as much money in that particular year which means that your tax rates are going to be lower because of the progressive tax system so then if you could take the loss in a year other than the current year that the loss actually happened it might be more of a tax benefit because then you're going to get a deduction for taxes at a higher tax rate due to the progressive tax system possibly so we have qualified disaster loss a qualified disaster loss also includes an individual's casualty or theft loss of personal use property that is attributable to a major disaster declared by the president under Section 401 of the Stafford Act in 2016, Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria and the California wildfires in 2017 and January 2018 so clearly if you're in an area that has had a disaster then you're going to want to make sure to do your research on that particular disaster if you're a tax preparer in that particular area so then we have a major disaster that was declared by the president under Section 401 of the Stafford Act and that occurred in 2018 and before December 21, 2019 and continued no later than January 19, 2020 except those attributable to the California wildfires in January 2018 that received prior relief and a major disaster that was declared by the president during the period between January 1, 2020, February 25, 2021 also the disaster must have an incident period that began on or after December 28, 2019 and on or before December 27, 2020 however this change does not include those losses attributable to any major disaster which has been declared only by reason of COVID-19 and must have ended no later than January 26, 2021 the definition of a qualified disaster loss does not extend to any major disaster that has been declared only by reason of COVID-19 because the incident period for COVID-19 extended beyond January 26, 2021 thus given that the incident period for COVID-19 generally ran from January 20, 2020 to May 11, 2023 a loss due to COVID-19 is not a qualified disaster loss makes perfect sense of course so again if you have any of these losses that are in your particular area you might want to do more research on them if you do tax preparation in those areas part of that preparation is to look at the actual software to see how it can help you to calculate the losses software is quite helpful as per usual if you suffered a qualified disaster loss you are eligible to claim a casualty loss deduction to elect to claim the loss in the proceeding tax year and deduct the loss without itemizing other deductions on schedule a so here's this is a big key here so if you suffered a qualified disaster loss you are eligible to claim a casualty loss deduction to elect to claim the loss in the proceeding year so again we talked about that before if you have the ability to do that that might be more beneficial because if you claim it in the prior year one you might be able to get the benefit sooner because you could file the tax return possibly sooner in that case and to your income might be higher in the prior year before the loss took place so that might give you more of a tax benefit and deduct the loss without itemizing other deductions on schedule a in other words this is something reported on the schedule a but if usually you have to clear a threshold in order to take the schedule a deductions them being higher than your standard deduction but as you would expect for these kind of losses you would want to give the deduction to everyone because of the circumstances being unusual and so on with a casualty loss and therefore although reported on a schedule a you might be able to deduct them even though your standard you're taking the standard deduction so you can see qualified disaster losses and increased standard deduction of reporting later for that see also irs.gov disaster tax relief for date specific declarations associated with these disasters and for more information losses you can deduct for tax years 2018 through 2025 if you are an individual losses of personal use property from fire storm shipwreck or other casualty or theft are deductible only if the losses attributable to a federally declared disaster federal casualty loss you could see publication 547 for more information there if the event causing you to suffer a personal casualty loss occurred before January 1st 2018 but the casualty loss was not sustained until January 1st 2018 or later the casualty loss is not deductible however see when to deduct a loss later for more information on when a casualty loss is sustained so you could have situations that might seem kind of obvious if the disaster happened if there was a hurricane or something and it blew the home over then you would expect that would be the time period that the loss happened but you can imagine situations where the hurricane did something in one period which caused you to incur a loss at some future period where those two dates might not be exactly the same and that's where you get these kind of timing difference questions that could possibly come up caution and exception to the rule limiting the deduction for personal casualty and theft losses to federal casualty losses applies where you have personal casualty gains to the extent the losses don't exceed your gains so if you have a situation where you have gains this might be similar in thought process as to like gambling winnings where they say the losses you can only take the losses possibly if you could take any up to the amount of the winnings so in other words if you have to include income because of the situation because you receive some kind of income and that's taxable then possibly it would make sense to be able to record the losses up to the amount of the income to basically nullify the income that was required but that would be somewhat of an unusual situation you would think so if your property is covered by insurance and your loss is otherwise deductible you should file a timely insurance claim for reimbursement of your loss so clearly if you had a loss your house drifted out to sea for whatever reason from an earthquake or something and the whole house is now in the middle of the ocean well then you might have insurance for that and then of course the insurance is there to reimburse you to some extent for the loss so you want to file the claim if you don't file a timely insurance claim you can't deduct the full unrecovered amount as a casualty or theft loss and only the part of the loss that isn't covered by your insurance policy is deductible in other words if you get a loss your house drifts out to sea and you say I'm not going to report the insurance because I want to take the loss on my tax return before I have to include the fact that I got insurance reimbursement that should reimburse me for the loss the iris is going to be skeptical of that type of scenario they're going to say well you can't take you know the loss in that case if you didn't try to recap the losses with the insurance proceeds which would reduce the amount of loss that you could basically take and in that case then you can only take you would think the loss for the amount that is uninsured right because you're going to be fulfilled from the loss by the insurance not by the federal government in that case related expenses the related expenses you have due to a casualty or theft such as expenses for the treatment of personal injuries or for the rental of a car aren't deductible as casualty or theft losses costs for protecting against future casualties aren't deductible but should be capitalized as permanent improvements so you might say well what about these minor costs not typically deductible what about if there was a storm and that caused the disaster and then I bought better storm protection in the future for my home to help prevent the disaster in the future well that's not typically something that would be deductible as a casualty loss but it might be something that could be capitalized as part of the property meaning it's part of the cost of the home or part of the cost of your business property which if it was business property might be able to be deductible as a business type of expense or if it's part of your home could possibly help to reduce the amount of gain that you might realize on the event or when you sell the home which is going to be the sales price minus the cost of the home although you have a huge exemption that also helps out in that particular case as well but in any case an example would be the cost of a levy to stop flooding so losses you can't deduct money or property misplaced or lost so breakage of china glassware furniture and similar items under normal conditions so the dog jumped on the furniture broke it and then the furniture ran into the cupboard which all the china broke and so then you try to take a loss because you should have trained the dog better it's your fault it's your fault train get a child dog trainer so so then you have the progressive damage to property building closed trees etc caused by termites moths other insects and disease so again if you have insects termites and whatnot first of all that's not really a casualty loss because it's going to happen over a long term basis you might notice that termites bellies aren't aren't that big because they're small in particular so it takes a long time for the termite to eat through so it's not like an event that happened rapidly and once again that's kind of on you to take care of the termites typically so a decline in market value of stock casualty or disclosure of accounting or other legal misconduct by the officers or directors of the corporation that issued the stock that was acquired on the open market for investment so if your stocks go down in value there was a crash or something like that well that's not like a casualty loss if you had Bernie Madoff as your investment broker well then again that's kind of your fault you should look a little bit so you may be able to deduct it as a capital loss on schedule D meaning if you sell the stock and it went down in value then you're going to have a capital loss that you might be able to report on a schedule D but not a casualty loss you would think that could be reported on a schedule A so if the stock sold or exchange or becomes completely worthless you can see chapter 4 publication 550 investment income and expenses for more detail there gain on reimbursement so if the amount you receive in insurance or other reimbursement is more than the cost or or other basis of the property you have a gain so in other words you can't deduct something as a loss you lost your home it went out into the ocean but then the insurance company gave you more money than the value of the home well then you don't have a loss you possibly have a gain in that situation which means they could have have to pay taxes on it you would think so if you have a gain you may have to pay tax on it or you may be able to postpone the gain so don't report the gain on damage destroyed or stolen property if you receive property that is similar or related to it in service or use your basis and the new property is the same as your basis and the old property so in other words if you have insurance and what they give you instead of money is new property well you might have like an old restaurant let's say we have the old restaurant and it's still in good shape but you depreciated it that means the book value of the restaurant is down so if you sold it you would have a gain on it because because the value of the restaurant is higher than its book value or its basis well what if you replaced it with a new restaurant then the new restaurant is going to have a higher value you would think if you were to have purchased it then the cost but it's really just replacing what you had before and you didn't really sell the restaurant you didn't want to realize the gain so you would think maybe then you can have the new restaurant in place at the old restaurant's basis or cost so that you'll be in the same situation and won't have to realize the gain until you actually sell the restaurant in which case you have to take the basis of the old restaurant instead of the increased basis of the new restaurant so that you would have to recognize the income or gain at the point of sale of the new restaurant that would be the general idea okay so that's that so any tangible replacement property held for use in a trade or business is treated as similar or related in service or used to property held for use in a trade or business or for investment if the property you are replacing was damaged or destroyed in a disaster and the area in which the property was damaged or destroyed was declared by the president of the United States to warrant federal assistance because of that disaster so if you talk to their partners in China then they'll tell the president what to do about that you might be able to get some I'm just kidding I'm just kidding generally you must recognize the gain if you receive unlike property or money as reimbursement but you can generally choose to postpone all or part of the game if within two years of the end of the first tax year in which any part of the game is realized you purchase property similar or related in service or use to the damaged destroyed or stolen property so now you're in a situation okay I had a restaurant it went out in the ocean because of the earthquake it's gone the insurance company is not going to give me a new restaurant they're going to give me money but the money is going to be higher than the adjusted basis of the restaurant because I depreciated it over the 20 years that I owned the restaurant so I don't want to have to realize the gain because I'm going to have to replace the restaurant with a new restaurant and if I recognize the gain at this point in time I'm not going to have enough money to buy what I need to buy to replace my property so again you would think can't I do the same thing as if the insurance company gave me a new restaurant meaning they give me the money I buy a new restaurant and then instead of having the new restaurant on the books at the cost that I paid for the restaurant I keep the same basic adjusted basis or I try that's the concept right I try to keep the same adjusted basis of the prior restaurant so that I didn't realize the game so it would be putting me back into the same position I was in before so that I haven't yet sold the restaurant realizing the gain and when I do sell the restaurant instead of recording the game using the new adjusted basis or the new cost I would have to use the prior basis so that I would recognize the game you know when I sell it that would be you could see how that would be an issue that could come up right so a controlling interest at least 80% in a corporation owning such property okay to postpone all of the gain the cost of the replacement property must be equal to or more than the reimbursement you received for your property so if the cost of the replacement property is less than the reimbursement received you must recognize the gain to the extent the reimbursement exceeds the cost of the proper of the replacement property so you can see that this gets a little bit messy right because then you can imagine people purchasing at the new restaurant at you know that has a different value and so on then the restaurant that they lost and so on so you can if that applies you'd have to get more into the nuances and make sure that you're properly recording everything so that you can record the loss correctly in the current year if you have any and also so that you can get your basis properly recorded so that when you do sell the restaurant you can record the gain or loss on that sale capital gain or loss properly so if the replacement property or stock is acquired from a related person gain generally can't be postponed by so now you have this issue of most of the time for taxes we assume an arm links or market transaction when people have transactions from family members obviously it's not a fair market value transaction often times and then and therefore the government's going to suspect weirdness going on and possibly put different rules in place so corporations other than s corporation partnership in which more than 50% of the capital or profits interest is owned by corporations other than s corporations or all other taxpayers unless the aggregate realize gains on the involuntary converted property are $100,000 or less for the tax year this will applies to partnerships and s corporations as both the entity and partner are shareholder level so it goes up we're going a little bit beyond the scope of our major focus here which is generally form 1040 individual taxpayers but you get the kind of idea of related parties and related parties with regards to business entities because you know corporations are separate legal entities and so on so when to deduct a loss generally you can deduct the part of your casualty or theft loss that isn't reimbursable in the tax year the casualty occurred or the theft was discovered however a disaster loss and a loss from a deposits in insolvent or bankrupt financial institutions may be treated differently so you could see disaster loss and special treatment for losses on deposits in insolvent or bankrupt financial institutions later so if in the year of the casualty there is a claim for reimbursement with a reasonable respect of recovery the loss is not sustained until you know with reasonable certainty whether such reimbursement will be received so if you're going to get a reimbursement that will impact the amount of calculation of the loss you would think so you want to take that into consideration or the iris would want you to in order to take to calculate the loss so if you aren't sure whether part of your casualty or theft loss will be reimbursed don't deduct that part until the tax year when you become reasonably certain that it won't be reimbursed this later tax year is when your loss is sustained so if you are reimbursed for a loss you deducted in an earlier year include the reimbursement in your income in the year you received it but only to the extent that deduction reduced your tax in an earlier year in other words you had a loss that happened you're going to get reimbursed for it in some way possibly by insurance or some other reimbursement to put you back to hold however you don't know exactly what that is so you took the loss based on the best calculation that you could do and then in the following year you got reimbursed for some of the amount that you took a deduction from so what do you do do you have to go back to the prior year and amend the tax return well maybe not possibly you can do a similar thing as would be the case as we saw for state income tax refunds meaning if you got the tax deduction on a schedule A in the prior year you got a benefit from it from deducting it instead of adjusting last year's taxes instead of trying to adjust the losses in the current year because you're not going to have any losses in the current year hopefully because it was a one-time thing you might include it in income in the current year why because that would be the easiest thing to do right so you might have that situation so see losses so see leases loss in publication 547 for special rules on when to deduct losses from casualties and thefts to leased property