If you've had something stolen from you, you might find at least some consolation in the fact that the tax code allows a deduction for theft losses. However, the deduction is quite limited. If the item stolen didn't have significant monetary value, you might not be able to take the deduction at all.
Only people who itemize their tax deductions have the opportunity to deduct losses from theft. If you take the standard deduction, you can't claim theft losses. Taxpayers must use Internal Revenue Service Form 4684 to figure the amount of their allowable deduction. You enter your deduction, if any, on Line 20 of Schedule A, "Casualty and Theft Losses."
The first thing you have to do is determine the "fair value" of whatever it is that was stolen. If it was cash, that's easy -- $10,000 in cash, for example, always has a fair value of $10,000. With property, though, it's more difficult. Say you paid $30,000 for a car five years ago, and that car was stolen this year. You don't get a $30,000 deduction. Your deduction will be based on the value of the car when it was stolen -- when it was five years old, in whatever condition, with however many miles on it. Determining fair value for certain items may require hiring a professional appraiser, who would come up with a value based on a description of the stolen item.
Figuring Your Loss
Once you've determined the fair value of the stolen item, subtract any reimbursement you received or expect to receive. This could be an insurance settlement or restitution from the thief. What's left over is your "theft loss" as defined by tax law. Now subtract $100, because the first $100 of any loss is not deductible. The result can be called your adjusted loss. If the adjusted loss is zero or less for the item, you don't get a deduction. Otherwise, take the adjusted loss and add it to any other adjusted losses you had during the year from theft or casualty, such as a fire or tornado.
The 10 Percent Rule
The final step is to reduce your combined theft and casualty losses by 10 percent of your adjusted gross income. This is the big one -- the step that significantly reduces or even eliminates many theft-loss deductions. Say you determined that your car was worth $18,000 when it was stolen, and you got an insurance settlement for $15,000. Your theft loss is $3,000, adjusted to $2,900 after knocking off $100. If your adjusted gross income is $25,000, then you'd subtract $2,500 -- or 10 percent of $25,000 -- for a theft loss deduction of $400. If your adjusted gross income were $29,000 or above, you'd get no deduction, because 10 percent of it would exceed your loss.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.