 Income tax 2022-2023, itemized deductions, casualty, and theft losses tax software example. Let's do some wealth preservation with some tax preparation. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course. Each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Here we are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website, irs.gov, irs.gov. Starting point, as usual, single filer Mr. Anderson, no dependents, 100,000 W2 income. We've got the 12,950 standard deduction getting us down to the 80,050, 87,050. Page two, calculating the tax line 1614774 starting with the $15,000 withheld getting us to the 226. Now we're focused on page one, however, the calculation of taxable income and we're focused on the standard deductions and the itemized deductions focusing more on the itemized deductions which normally you wouldn't be taking the itemized deductions unless they add up to more Then what is on the standard deduction 12,950 for single filers 25,900 for married filing joint. However, when we're looking at federally declared losses, for example, or qualified losses, we could have a situation where the standard deduction isn't being cleared but we're using the Schedule A to still get a benefit even though we would in essence be taking the standard deduction, which you would think kind of makes sense if people had it like a disaster that would happen, but it's a little bit of a weird situation. So let's take a look at it now. If I open this up, we're going to go down to the Schedule A. So if I scroll down, now normally the thing that kicks people over to itemize are owning a home which includes the mortgage interest on the home and the taxes that kick people over the threshold possibly or the most likely thing to kick people over the threshold to be itemizing and then all this other stuff kicks in. We're focused down here on the casualty and theft losses. Now this used to be a more expanded category. If you remember a few years ago, they've limited it a lot to, as you can see here, casualty and theft losses from a federally declared disaster from a federally declared disaster other than net qualified disaster. So we have to attach form 4684. Now the thing that's funny is that if it's a federally declared disaster, my interpretation is that you can basically level it up from there to a qualified disaster in which case it would be more beneficial. There's a big difference between those two designations and if it was a qualified disaster, it'd be pushed down here in essence to the other itemized deductions and in that instance, even if you're not itemizing, you might get a benefit because it'll basically add in the standard deduction over here. So we'll still use the schedule A but you could get a benefit even if you're taking a standard deduction. So the bottom line is if you're thinking about these like a disaster that happened, you want to know the current location you're at, the disaster that possibly could have happened in that area that you might have to be dealing with, get more information on the IRS website related to it as well as FEMA website and then realize that even though it's going to be kind of pulled into the schedule A, you might be in a situation where people that are not itemizing would still get kind of a benefit from it due to the calculation. Also note that if the disaster happened, you might in like 2023 for example, you might be able to choose whether or not you can take the loss in the year it happened in that case 2023, which means you wouldn't actually file for it by until April 15th of 2024 or possibly you might be able to take the loss on the prior year. So if it happened in 2023, we might be able to take the loss in the 2022 tax return, which if you hadn't yet filed that tax return, you could file or possibly if you had already filed it, you might have the option to amend the tax return. And in that case, you might get a bigger tax benefit if you take the loss in the year that the disaster didn't actually happen because the year in which the disaster actually happened may have resulted in your income being a lot lower than it otherwise would have been. And because of the progressive tax system, you might not get as big a benefit from a deduction in the year with a lower income. Okay, so that said, the difference between the declarations, I'll just give a quick recap here, limitation on personal casualty and theft losses, personal casualty and theft losses of an individual sustained in a tax year beginning after 2017 are deductible only to the extent that the losses are attributable to a federally declared disaster. Okay, so personal casualty and theft losses attributable to a federally declared disaster. A disaster, a horrible, horrible disaster. Are subject to the $100 per casualty and 10% of your adjusted gross income limitations. That's a big limitation even though they're federally declared disaster unless they are attributable to a qualified disaster loss. So now we've got this qualified disaster loss becomes important. Personal and casualty theft losses attributable to a qualified disaster loss are not subject to the 10% of AGI limit and the $100 limit is increased to $500, an exception to the rule above, limiting the personal casualty and theft deduction and losses attributable to a federally declared disaster applies to you have a personal casualty canes for the year. Okay, so it's important to kind of get the designation correct in other words, and then we could have it then be applied to one of these two items. Let's first take the first kind of designation, which is the less tax beneficial designation. Now normally when you put this into the system, it's in the same kind of area for a lot of the tax software as though you're making a disposal. So it would be like a schedule D kind of thing because it's a capital gain kind of situation. Although you're going to have a loss in this situation because instead of having a sales price, you just disposed of the property or in other words the property was involuntarily destroyed or something like that. So I'm just going to call it personal property. Personal property, I'm going to say date acquired negative 010100, which will create a various date in my software and then the date sold. I'm going to say sometime within 2022 when the disaster happened, let's say 060602 or 22 in sometime in 2022, sales price is zero because I didn't sell it. It got destroyed. The cost let's say is 10,000 and then I'm going to find on the left hand side where it says we have a casualty loss casualty theft and loss form 4684 description. I'm going to say it was like a fire, let's say personal property disaster code. You'd have to find the proper disaster code. Most software should have the disaster codes implemented because this is how they set the whole thing up, right? You got to designate the disaster code. Now, again, there's a difference between the qualified disaster and something that's non-qualified. Non-qualified is less beneficial. Let's start with that. And then FEMA disaster declaration code. So this is for a qualified disaster. I'm not going to add it for this one and then a qualified California disaster code. Again, you could find those if they're applicable. You should be able to find them on the FEMA website and the IRS website and then drill down on the specifics of the disaster related to you. Fair market value before casualty and theft. Now, normally the fair market value will be less than the cost unless it's like real property like a house where the house might have increased in value. But if it was a car, you would expect the fair market value to be less than the cost. So that's what I'm going to put here. And then the fair market value after casualty, meaning was there any value after the problem? I'm going to say zero. It was washed into the sea. And then insurance, let's say the insurance reimbursed us but didn't fully reimburse us just to get an idea of that of 1,000. And let's see what that does for us. So if I pull over to the schedule A, notice it's still not populating anywhere. If I jump to form 4684, let's go over to the 4684. It's starting to populate the casualty and theft loss form here. And you could see the calculation of 10,000 and then minus the 1,000 and basically took the lesser of the cost or the fair market value minus the reimbursement of the insurance, which gets us to the 8,000. And then it's following the rule of taking 100%. And then it should be taking that 10% of the AGI, but in any case, it's not pulling over to the schedule A right now because in this case I'm not clearing the threshold to be able to itemize. So let's pretend we're going to clear the threshold. So I'm going to make a couple changes. I'm going to lower the AGI, the wages. So I'm going to say let's say the wages were at 50,000. So now 10% will be a lot lower and I should still get a deduction of that. And so if I go back on over, notice it still is not populating a schedule A. Let's then also add the home mortgage interest, the thing that usually kicks us over. So I'm going to say deductions and let's go to the itemized deductions, interest. And let's say the interest was at like 15,000. So now schedule A is populated and now I can say, okay, we're over the threshold of the 15,000. And then it's pulling in that 2,900. So the 2,900 is basically taking the 4,684 and we were at the 7,009 minus the 10% of the AGI, which is 50,000 times 10%, 5,000 gets us to the 2,900, which is pulling over to the schedule A and it's pulling it into the category of the casualty and theft losses. So now let's imagine that it was a qualified disaster situation. And again, I'm just giving like a general idea of how these are populated and you want to look up the actual issue that's in your particular location. But let's go back on over and say that we have a qualified. We would need the address of the place that it took place in order to populate it as well. But let's pick now, let's say it was a California wildfire disaster. Now let's say it's a federally declared qualified disaster. So a generic federally declared qualified. I'm going to say California. Let's just pick a California code. I'm just picking one here and let's say I'm not sure the code matches. But I'll pick one there and then everything else will remain the same. So now it's qualified is what I'm trying to point out as being the difference. So now it's pulling in here. It went from a casualty and theft loss to other itemized deductions. And now it says net qualified disaster loss. It's calculated a little bit differently over here on the form 4684 where it had the $500 deduction and you don't have that same 10% thing that's happened at the bottom of AGI, which was a big issue. In other words, if I go back on over and say there's the $7,500, if I bring my net income back up to $100,000, I go to my wages, my net income, is that $100,000 again, then it's still at the $7,500. I don't have that AGI kind of thing. And also now, what if I wasn't itemizing? What if I didn't own my home and I wasn't paying this $15,000 of interest? I don't get that deduction. So I can go then let's bring that back off the table and then I'm going to go back on over. And so now on the scale, I still have a schedule A you can see, now it's a schedule A with the standard deduction kind of thing embedded in it. So now once again, it's not on the casualty side, it's in the other itemized deductions. So these things are kind of linked together now because this is one of the big ones that would be in either of these categories depending on the situation. But now it's a net qualified disaster and you can see it pulled in the $7,500 from the 4684 just like before, but we wouldn't have got a benefit from it because we weren't itemizing and that's not going to kick us over the threshold in and of itself of the $12,950 to itemize. So it gives us the $12,950. So now notice what it's doing. There's the itemized or the standard deduction plus the $7,500. Let's just see. Right, we're taking the $12,950 plus the $7,500 forcing us to basically get a benefit from this at the $20,450 and that's what's pulling over to the Schedule A. So it's a little bit tricky how they kind of work that Schedule A in these disasters. So it's got to be a federally declared disaster. Is it a qualified disaster that could impact where it goes on the Schedule A and then you may not have the same kind of threshold requirements if it's a qualified type of disaster. So you want to kind of dive into those qualified or those federally declared disaster areas and do more research on them to make sure you're up to date on the rules related to them. This is just a general conceptual overview of what might happen on the tax software side.