 Income tax 2022-2023. Itemized deductions, casualty and theft losses. 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. Most of this information comes from the Schedule A Tax Year 2022 instructions. You can find it at the IRS website irs.gov irs.gov when looking at the income tax formula. We're focused down here on the itemized deductions. Remembering the first half of the income tax formula is an Essenton income statement where we have income minus the equivalent of the expenses. Those being the deductions equals the equivalent of net income that being taxable income. Everything being topsy-turby for taxes meaning the taxable income we wanted as low as possible as opposed to normally when we want the net income as high as possible. In prior sections we talked about what needs to be included in income. We talked about what can be called the above the line deductions or adjustments to income as opposed to the below the line deductions we are talking about now. That got us to the subtotal of the AGI adjusted gross income and important subtotal because it's often the number used to have phaseouts for income levels that are increasing with regards to expenses and credits. And then we have what could be called the below the line deductions, greater of the standard or itemized deductions. Here we're focused on the itemized deductions. Deduct whatever is left. Which we would only be taking if they were greater than the standard deduction. Although we may have an exception to the rule. For example, if we have a loss related to a federally declared disaster area, then we might use the schedule A, the form used to calculate the itemized deduction to report the loss and but we might still get a benefit from it even if the itemized deductions are not greater than the standard deduction tax software is quite helpful to guide us through that type of situation if it occurs. So for example, this is the first page of the form 1040. We're focused on line 12 standard deduction or itemized deduction. We usually take the itemized deductions only if they're greater than the standard deduction, which is 12,950 for single filers, 25,900 for married filers. But if we have a qualified disaster related loss, we would still calculate that on the schedule A and possibly even if we're not clearing these thresholds, be able to increase the amount of the otherwise taken standard deduction related to those items. So those are going to be kind of exception areas for those particular and unique type of cases or those extreme type of cases. Now the standard deductions, remember normally you got to clear the standard deductions, the 12,950 for the single file, the 25,900 before you get a benefit from the itemized deductions, however, it would make sense that if you had a deduction related to a qualified disaster that you should get a benefit from that whether you take the standard deduction or the itemized deduction because that's something that's kind of outside the norm. So you might have an exception in that case. Okay, casualty and theft losses. Line 15, complete and attach form 4684 to figure the amount of your loss. You can only enter the amount from form 4684 line 18 on line 15. You can only deduct personal casualty and theft losses attributable to a federally declared disaster to the extent that and this you might be remembering like old rules. So remember you got to be updated on the tax code. So once again, you can only deduct personal casualty and theft losses attributable to a federally declared disaster to the extent that one, the amount of each separate casualty or theft loss is more than $100. That $100 threshold seems quite low, possibly, and it's been there for some time. So there's some things in the tax code. They kind of put this number in the tax code that they don't change it over time. It just sits there and then after time it looks kind of ridiculous because it hasn't been kind of changed for inflation, but they haven't removed it either. So we've got that $100 threshold. 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, 1040 SR line 11, which I believe is the AGI, and three, see the instructions for form 4684 and publication 547 for more information. This is publication 547 Casualty Disasters and Thests for year 2021, but this is the most current revision that I can find at this point in time at the IRS website, irs.gov, irs.gov, personal property. The FEMA Disaster Entry Space in Section A Personal Use Property on Form 4684 was added to the form for taxpayers reporting casualty or theft loss attributable to a federally declared disaster. So if you are reporting a casualty or theft loss attributable to a federally declared disaster, check the box, enter the DR or EM declaration number assigned by FEMA. So how it generally works is FEMA is going to be the one that determines whether it's a federal disaster or not, and then it's going to be adopted and you have the FEMA kind of code and you can look up and make sure that it is indeed something that is a federally declared disaster. And the space provided above, line one on your 2021, this is the 2021 instructions, but I still think it's the most revised publication at this time, form 4684. So for more information, see the FEMA Disaster Declaration number later. Special rules and return procedures expanded for claiming qualified disaster-related personal casualty losses. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded the special rules and return procedures for personal casualty losses attributable to certain major federal disasters that were declared in 2018-2019-2020. Personal casualty losses sustained in those tax years as a result of qualified disaster losses may be claimed on form 4684. See qualified disaster loss later for more information. Tip, you may have to file an amended return on form 1040X to claim these benefits on your 2018-2019 and or 2020 returns. Form 1040X is available at irs.gov. So if you needed to amend the return, that's the 1040X. Prior versions of form 4684 are available at irs.gov. 4-6-8-4. See how to report the loss on form 1040X later. 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, once again, in case you didn't get that point. Personal casualty and theft losses attributable to a federally declared disaster are subject to the $100 per casualty and 10% of your adjusted gross income, the AGI limitations, unless they are attributable to a qualified disaster loss. So personal casualty and theft losses attributable to a qualified disaster loss are not subject to that 10% of AGI limit and the $100 limit is increased to $500. An exception to the rule above, limiting the personal casualty theft loss deduction to losses attributable to a federally declared disaster applies. You have personal casualty gains for the tax year. For more information, see deduction limit later. Introduction, this publication explains the tax treatment of casualty theft and losses on deposits when casualty occurs when your property is damaged as a result of a disaster such as storm, fire, car accident or similar event. A theft occurs when someone steals your property. A loss on deposit occurs when your financial institution becomes insolvent or bankrupt. So this publication discusses the following topics. Definitions of a casualty theft and loss on deposits, how to figure the amount of your gain or loss, how to treat insurance and other reimbursements you receive. Obviously, that's a key component when you're thinking about a loss type of situation because you're going to say this is the loss that I have and then did you get reimbursed with it for the insurance because then that's obviously recouping part of the losses. The deduction limits are when and how to report a casualty theft, the special rules for disaster area losses. So forms to file generally when you have a casualty or theft, you have to file form 4684. You may also have to file one or more of the following forms. We've got the schedule A form 1040. That's where our general focus is here. Schedule A form 1040 in R for non-resident aliens. Schedule D form 1040. And then form 4797. Condemnations for information on condemnations of properties and see involuntary conversions in chapter one of publication 544, sale and other disposition of assets. So workbooks for casualties and thefts. You've got publication 584, Casualty Disaster Theft Loss Workbook Personal Property is available to help you make a list of your stolen or damaged personal property and figure your loss. So obviously when we're thinking about a loss that has occurred, we've got to determine what the loss is. If we've got personal property, then we may have to, you know, list out the property and whatnot to help us to determine the loss. So it includes schedules to help you figure the loss on your home and its contents and your motor vehicles. Publication 584B Business Casualty Disaster and Theft Loss Workbook is available to help you make a list of your stolen or damaged business or income producing property and figure your loss. Casualty. A casualty is the damage destruction or loss of property resulting from an identifiable event that is sudden, unexpected and unusual. So those are kind of key components here of the casualty. So your car rusted over a long term over 20 years, you know, it turned into a pile of rust. Well, that's not a sudden type of event. It should be an unexpected, you know, type of event, something that you would not normally have foreseen. For example, so it rained. If it rains quite often and the rain caused it, well, that's not really unexpected. If it was a storm and your whole house blew away, then obviously that would be unexpected and generally unusual. Okay, so a sudden event is one that is swift, not gradual or progressive. So you can't say the rust on your car over the last 30 years. So an unexpected event is one that ordinarily unanticipated and unintended. So again, the rain happening in the winter is something that wouldn't be unanticipated. An unusual event is one that isn't a day-to-day occurrence and that isn't typically a typical of the activity in which you were engaged. So it's got to be something obviously somewhat unusual. Casualty losses or deductible during the tax year that the loss is sustained, this is generally the tax year that the loss occurred. So in general purposes, you would think usually that you would be able to get the deduction when the casualty happened. We may see some exceptions with like federally declared disasters, for example, where you might have some capacity to take between two years of taking the loss here, but you would think the normal rule would be that you take the loss in the year that it occurred. So however, a casualty loss may be sustained in a year after the casualty occurred. See when to report gains and losses and table three later. So definitions, three specific types of casualty losses are described in this publication. What publication? You got the federally declared losses, the disaster losses, and qualified disaster losses. So all three types of losses refer to federally declared disasters. Remember that was a key component here, federally declared disasters, right? Your cousin stole money out of your wallet or something like that, isn't a federally declared disaster. So but the requirement for each loss vary. So a federally declared disaster is a disaster determined by the President of the United States to warrant assistance by the federal government under the Stafford Act. So a federally declared disaster includes A, a major disaster declaration, or B, an emergency declaration act under the Stafford Act. Federal casualty loss. A federal casualty loss is an individual's casualty or theft loss of 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 now you've got this declaration that you have this formal process that the loss has been declared. If you've suffered a federal casualty loss, you are eligible to claim a casualty loss deduction. If you suffered a casualty or theft loss of personal use property that wasn't attributable to a federally declared disaster, it isn't a federal casualty loss and you may not claim a casualty loss deduction unless the exception applies. See the caution under deductible losses later. Disaster loss. A disaster loss is a loss that is attributable to a federally declared disaster and that occurs in an area eligible for assistance pursuant to the presidential declaration. The disaster loss must occur in a county eligible for public or individual assistance or both. Disaster losses aren't limited to the individual personal use property and may be claimed for individual business or income producing property and by corporations as corporations and partnerships. If you suffered a disaster loss, you are eligible to claim a casualty loss deduction and to elect to claim the loss in the preceding tax year. So once again, now we've got this tax year situation in terms of when are you going to declare be able to declare the loss. And this is kind of important because of course if for example, you're in tax year 2022 and that's when the actual disaster happened in the year of 2022. But at least no big disasters happened. Well, you wouldn't get the benefit from a tax perspective until you filed a tax return by April 15th of 2023 and even then you might not get as much of a benefit from the loss because you might not have as much income because the disaster, you know, hampered your ability to make income. So if you can take the loss in the prior year or something like that, then maybe your income would have been higher and maybe you can amend the tax return or if you haven't filed the tax return, you could file the tax return and possibly get access to the support sooner maybe in that way and possibly get a higher tax benefit. So you want to take into consideration when you can deduct the loss. So once again, if you suffered a disaster loss, you are eligible to claim a casualty loss deduction and to elect to claim the loss in the preceding tax year see disaster area losses later. Okay, so qualified disaster loss. So a qualified disaster loss also includes an individual's casualty and theft loss of personal use property that is attributable to a major disaster declared by the president under section 401 of Stanford Act in 2016, a hurricane Harvey, a tropical storm Harvey. This is Hurricane Irma. These are going to be applicable to 2021. So it's going to be a different set of items this year. So I'm going to go through these here. If you suffered a qualified disaster loss, you are eligible to claim a casualty loss deduction to elect to claim the loss in the preceding tax year and to deduct the loss without itemizing other deductions on schedule a form 1040. You can see irs.gov for slash disaster relief for date specific declarations associated with disasters for more information. So in other words, you want to make sure you look up the actual disaster so you can get the proper designation of what the disaster is so you can do the proper recording on the tax return. So deductible losses for tax year 2018 through 2025. If you are an individual casualty losses of personal use property are deductible only if the loss is attributable to a federally declared disaster federal casualty loss. So if the event causing you to suffer a personal casualty loss not attributed to a federally declared disaster occurred before January 1st, 2018, but the casualty loss wasn't sustained until January 1st, 2018 or later, the casualty loss isn't deductible. So see when to report gain and losses later for more information on when a casualty loss is sustained. So we're not going to go into everything on this particular publication but we'll do an example in tax software possibly in future presentations. You could take a look at the IRS website for publication 547 as well as Form 4684 and related instructions if you want to drill down on this in more depth.