Uninsured Losses & Tax Deductions

Uninsured losses can be used to reduce your taxable income for federal tax purposes. The loss must be sudden, unexpected and unusual. Examples of this type of event would be a car accident, fire, earthquake, theft, robbery, burglary or flood. Losses that exceed the amount of insurance coverage can be deductible. If a fire causes $90,000 of damage, and insurance covers $50,000, the remaining $40,000 can be used on your tax return.

How Much Of The Loss Is Deductible?

The amount of the loss after insurance reimbursement that is deductible is reduced by 10 percent of your adjusted gross income (AGI). In addition, each loss must be reduced by a standard $100. If you have an uninsured loss of $40,000 and AGI of $50,000, the loss would be reduced to $35,000 by subtracting 10 percent of your AGI ($5,000). Then the loss would be reduced by the standard $100. The amount that could be deducted would be $34,900. IRS Form 4684, Casualties and Thefts, is used to calculate the amount of the deduction. The total from Form 4684 is recorded on your Form 1040, Schedule A, Itemized Deductions.

What Is Included In The Loss For Tax Purposes?

The casualty loss is the total of the expenses to repair the damages. Any insurance reimbursement is subtracted from this total. There are some types of reimbursements that do not have to be used to reduce the loss for tax purposes. The most common type of excludable reimbursement is living expenses paid by your insurance company for hotels or meals away from your damaged home. Another example would be unrestricted cash gifts that you receive as a disaster victim.

You Must Itemize Your Deductions To Benefit

Taxpayers are allowed to itemize or take the standard deduction. If the total for your itemized deductions does not exceed the standard deduction, the taxpayer receives greater benefit from the standard deduction. For the 2010 tax year, the standard deductions are: Single or Married Filing Separately $5,700; Married Filing Jointly or Qualifying Widow(er) $11,400; and Head of Household $8,400. A married couple filing jointly would have to have a casualty loss plus other deductions totaling more than $11,400 to benefit from itemizing. A small, uninsured loss of $2,000 after the 10 percent AGI and $100 deductions might not be enough to justify itemizing. In this instance, the taxpayers get no tax benefit from their uninsured loss.

Good Record-Keeping Is Important

If an uninsured loss is large enough to qualify for itemization on your Schedule A, careful record-keeping is important in case of IRS audit. Records should show the type of casualty loss (car accident, fire, etc.) that caused the damage, that you owned the property, bills for repairs, the amount of insurance reimbursement, and any other documentation that supports the loss. All records should be kept for a minimum of three years.