Casualty losses can be a hard sell to IRS

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Best bet: Don't misplace that expensive piece of jewelry.

If you do happen to lose a pricey ring or bracelet after accidentally falling out of a canoe, chances are pretty slim you'll be able to deduct the loss on your taxes because the guidelines are pretty strict -- but it's not entirely impossible.

The Internal Revenue Service allows taxpayers to claim certain casualty losses on their income tax returns. Many people do not claim the deductions -- either because they fear being audited or they may not even be aware that it is possible.

"I wouldn't be surprised if there are clients who have casualty losses but don't tell me about it because they don't realize there's a potential deduction for their loss," said Howard Davis, president of the Downtown accounting firm Davis, Davis & Associates.

Some clients do ask about it, he said. It doesn't always get them very far. "After going through the formula to determine what loss they can take, a lot of times there's nothing to deduct," Mr. Davis said.

Casualty loss is a term used to describe losses of valuable personal property that are caused by sudden, unusual and unexpected events, such as fire, vandalism, storms, floods, earthquake, theft and terrorism. The loss must be caused by some circumstances beyond the taxpayer's control.

The IRS doesn't allow a casualty loss deduction if the taxpayer loses or misplaces the property, or if the property breaks or wears out over time.

Even when taxpayers are aware of the potential deduction, their losses aren't usually high enough to make a sizeable difference in their tax bill, mainly due to the severe limitations the IRS imposes on people who claim personal casualty losses.

Dan Phillips, a tax adviser and shareholder at Schneider Downs in the Strip District, said filers can only deduct the amount of a loss that is not covered by insurance. And if the taxpayer has insurance yet chooses not to file a claim, he cannot claim a deduction.

IRS rules only allow taxpayers to deduct the amount of the loss that exceeds 10 percent of their adjusted gross income for that year, which could eliminate many casualty loss deductions.

On top of that restriction, the taxpayer also must subtract $100 from each casualty loss claim.

So, a taxpayer earning $100,000 could only deduct casualty losses that exceed $10,000. Say someone was robbed of a Rolex watch valued at $30,000; he or she could only deduct $20,000 of the watch value on a tax return, minus $100. And that assumes the watch was uninsured.

If the watch were insured for at least $20,000, the taxpayer could deduct nothing.

"There are a lot of areas that aren't easily dealt with as far as estimating the value of the property involved and the potential insurance proceeds to be received," Mr. Phillips said.

"Although it's a deduction that's available, it's not the simplest to calculate, especially when the value of the personal property is not easy to establish."

Tim Grant: or 412-263-1591.

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