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Theft Loss Deduction - Should you claim it ?

  Sanjiv Gupta CPA  Published 
Theft Loss Deduction - Should you claim it ?

Theft Loss Deduction – Understanding what you can and can not deduct

The very thought of paying Uncle Sam becomes cumbersome. But again thinking of the benefits that you receive from tax deduction gives you relief. Out of the many areas where tax deduction can help, loss of uninsured properties due to theft is a significant one. In case you are a theft victim, there is no need to worry a lot. In order to know more about tax deduction pertaining to losses on account of theft, the following information will surely help.

As a taxpayer, you are provided deduction by the IRS in case you have suffered the sudden loss of substantial properties without any negligence from your end. But you need to ensure that you meet all the requirements in order to avoid reporting any wrong deductions on tax returns.

As per the Federal Law, theft refers to the confiscation of property by any individual with the intention of depriving another individual of that property. This act is undoubtedly illegal and is certainly punishable. Some of the known instances of theft are blackmailing, burglary, kidnapping for ransom, larceny, extortion, and robbery. However, if you lose money and property i.e. if you have misplaced those, then that does not fall under the category of theft. But if you get threatened by a person with physical coercion when you are attempting to get back your wallet, this kind of loss gets elevated to the category of theft and becomes deductible.

You need to produce the proof that you have lost your property on account of theft and the monetary amount of deduction should also be substantiated. In order to do this, as per the IRS, you need to show the precise time of loss and also provide ample proof that you own the pilfered properties. In case you fail to provide minute details of the event and your property, IRS would consider certain other types of proof that support the deduction.

The deductible loss for the money that has got stolen is equal to the sum of money you are unable to recover. In the case of property thefts, the basis has to be determined by you. The IRS says that it requires you as a taxpayer to not receive any reimbursement from any insurance company if you are taking the deduction. Insured properties that get stoned are not eligible for a tax deduction.

The tax deduction can help in losses due to theft if you follow the steps mentioned below in reporting the loss on the tax return.

  • You need to download a copy of the IRS form 4686.
  • You are required to complete the first item in Section A of the form and then list every piece of property that has got stolen. The detailed description of every property should be provided by you along with the location from where it had got stolen and also the date of originally acquiring the property.
  • Next, you need to move on to item 2 of the form. This means that now you have to list the price that had to pay for every item that has not got stolen. Every detail should be provided and should be original.
  • Item 3 talks about reimbursements. The list of reimbursement covers insurance payment that you have received for your property that got stolen.
  • Next, you need to check if the totals listed under Item 2 and item 3 vary. If you find that the totals pertaining to item 3 are more than those under item 2, then you are required to list the increase under item 4.
  • In item 5 you need to list the probable market value of the items before the theft took place. Then after you come to item 6, you need to inform about the properties that are of no value to you. Against those stolen properties, you have to list $0 meaning that those are of no value to you.
  • In line 7 you need to re-enter the figures from line 5. Again inline 8, you need to re-enter figures either from line 7 or line 2, depending on whichever figure is lower. Then you need to deduct or subtract item 3 from item 8. The result that arrives has to be entered online 9.
  • Next, complete line 10 by adding the total of all the items on line 9. Line 11 is meant for entering the lower line of number 10 or $500. In line 12, you need to subtract line 11 from line 10 following which you need to enter the result.
  • Line 13 is complete when you enter the total of line 12s from all the form 4684 in total that you are filing. You need to enter the sum of line 4s from all the form 4684 in total in line 14 that you are filing with your taxes.
  • You should determine if the amount that you have entered in line 14 is greater than line 13. If it is, then you will get a capital gain from your losses due to theft and again the difference has to get added in line 15 and on Schedule D of your tax return. In case you enter a capital gain, you need not complete the test of the form.
  • Line 14 has to get deducted from line 13 and the result needs to be entered in line 16. You need to list in line 17 entering $0 in case the theft loss is not disastrous. Similarly, you need to enter $0 on line 18 as well. The figure from line number 16 has to be entered in line 19.
  • Then you need to calculate 10% of your gross earnings from Form 1040 and also line 38 and then enter that figure in line number 20. The figure that you would get by subtracting line 20 from line 19 has to be entered in line 21.
  • After adding the lines 18 and 21 the result that comes has to be entered in line 22. All these would reveal your capital loss in total from the theft for income tax reasons. This result should be entered on Schedule a, line 20.