It's not well known, but if you've had property stolen during the year there's a deduction for it in the Internal Revenue Code. The thresholds for claiming a loss are high, but if you've been the victim of theft you may be able to use those losses to decrease your tax bill.
Although there are a variety of rules and regulations dictating the terms for deductions, you are legally eligible to deduct stolen property on your income tax return.
Calculating Your Loss
To claim a deduction for stolen property, you need to know the value of your loss. To calculate your loss for tax purposes, start with the smaller of your adjusted basis, which is generally what you paid for the item, or the fair market value of the property before the theft. For example, if you paid $3,000 for a diamond ring that's now worth $4,000, your loss would only be $3,000 for tax purposes. If you bought a car for $15,000, but when it's stolen several years later it's only worth $6,000, you only have a $6,000 loss for tax purposes.
Impact of Insurance
If you have insurance on the stolen property, you are required to file a claim under the policy to be reimbursed. If you don't, you can't claim a tax deduction. Any reimbursement you receive reduces the amount of your loss. For example, if your car was worth $6,000, but your insurance policy paid you $5,000, you only have a $1,000 loss for income tax purposes. If the reimbursement exceeds your loss, you may have to report that amount as a taxable gain on your income taxes.
Reductions of Deductions for Stolen Property
After you've accounted for any reimbursement, you must further reduce that amount you can actually deduct for your theft losses. First, subtract $100 from the amount of the loss from each separate theft. Then, subtract 10 percent of your adjusted gross income from the value of all your theft losses during the year. For example, say in March your diamond ring, worth $3,000 but not insured, is stolen. In November of the same year your car, worth $6,000 and insured for $5,000 also is stolen. You subtract $100 from each separate theft, leaving you with a $2,900 loss for the ring and a $900 loss for the car, or a total of $3,800. If your adjusted gross income for the year is $30,000, the 10 percent threshold is $3,000, meaning you only get to reduce your taxable income by $800 for both losses combined.
Claiming Deductions for Stolen Property
To claim a deduction for stolen property, you must itemize your deductions on your taxes, which means you give up the standard deduction. To figure your deduction, use Form 4684 and copy the amount of your deduction to line 20 of Schedule A. This amount, added to your other itemized deductions, replaces your standard deduction and reduces your total taxable income for the year. In case the IRS audits your return, keep a record of when you discovered the property was missing, a police report that documents the theft, proof that you owned the property, and documentation that you filed a claim under any applicable insurance policy you have on the stolen goods.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."