Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Tax Deductions for Victims of Theft Crimes

Most people are victims of theft at some point in their lives. To help mitigate the financial devastation this often entails, the IRS permits taxpayers to take theft loss deductions on their tax returns.

Under 26 U.S. Code § 165(e), tax deductions can be claimed for losses connected with a theft. As usual, there are a few restrictions:

  • The taxpayer must take reasonable steps to recover the stolen item prior to claiming the theft deduction
  • The deduction must be made in the year that the theft occurred, or in the tax year in which it can be ascertained with "reasonable certainty" that reimbursement will not be received from an insurance claim or third party
  • The value of the item stolen must be substantiated by "credible evidence"
  • If the deduction is being claimed for theft from investment fraud, the taxpayer must show that the broker acted with criminal intent (that he or she was aware that the investment was a fraudulent one and sold it to the taxpayer by means of false statements)

Reasonable certainty

Per  Treas. Reg. § 1.165-1(d)(3), the deduction must be taken in the year where there is no "reasonable prospect of recovery," meaning that there is no substantial possibility that the taxpayer will have a claim settled on his or her favor. The taxpayer does not have to be an "incorrigible optimist" and the deduction will not be denied if the claim has merely "remote or nebulous" potential. "Reasonable certainty" is measured through a review of the facts and circumstances of the taxpayer’s particular case.

Credible evidence

Taxpayers are obligated to provide the IRS with "credible evidence" of the value of the loss. For property theft, this can be done by means of a recent receipt or expert appraisal. If the loss was the result of investment fraud, the loss estimate may be made by the bankruptcy receiver for a bankrupt firm or someone with "scientific, technical, or other specialized knowledge" per Rule 702 of the Federal Rules of Evidence. The taxpayer’s subjective belief of the value of the item is generally insufficient.

Amount of deduction

If insurance or other third party reimbursement covers part of a theft loss, only the balance may be deducted. The deduction must also be reduced by the salvage value of a recovered item. Note that the taxpayer’s adjusted basis in any property that is recovered will be the taxpayer’s cost decreased by depreciation or increased by any amounts spent on repairs that restore the property to its pre-casualty condition.

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Aboveā€“The-Line Tax Deductions

At this time of the year, chances are that you’re getting together information for preparing your 2014 income tax return or reviewing a return that’s already prepared. When you are doing so, it can pay to take a close look at the adjustments to income you can take on the bottom of page 1 of your Form 1040 or Form 1040A. These adjustments, which reduce the taxable income you’ll declare, are known as above-the-line deductions—you enter them just above the last line on the page, where you report your adjusted gross income (AGI).

Above-the-line deductions offer two key advantages. First, you are allowed to take the page 1 deductions regardless of whether you itemize deductions on Schedule A of your tax return.

Second, above-the-line deductions reduce your AGI and, in many situations, also reduce your modified adjusted gross income (MAGI). A lower AGI or MAGI, in turn, can provide tax savings on various tax return items. For instance, some taxpayers now can deduct medical expenses only to the extent they exceed 10% of AGI. With a lower AGI, you may qualify for a larger itemized medical deduction.

Looking at the lineup

There are more than a dozen categories of above-the-line deductions. They include:

IRAs. You can make contributions for 2014 until April 15 of 2015. Although many taxpayers won’t be able to deduct IRA contributions because of income and participation in an employer plan, some people might qualify for deductions.

Example: Alice Baker is a homemaker with no earned income in 2014; her husband, Carl, is employed and participates in his company’s retirement plan. The couple’s MAGI for 2014 is over $116,000, so Carl cannot make a deductible IRA contribution for that year. However, if the couple’s 2014 MAGI is less than $181,000, Alice can make a fully tax deductible contribution of up to $5,500 ($6,500 if she is 50 or older).

Other retirement accounts. Contributions to such accounts also reduce your AGI. Moreover, if you had self-employment income in 2014, you can contribute to a simplified employee pension (SEP) plan until the due date of your 2014 tax return. Thus, with a filing extension, the SEP deadline can be October 15, 2015. You generally can contribute nearly 20% of your self-employment income, with a SEP contribution cap of $52,000 for 2014.

Health Savings Accounts (HSAs). With certain high deductible health insurance plans, you can make tax-deductible contributions to an HSA; you can tap these accounts for health care costs without owing income tax. Again, if you qualify for a 2014 HSA contribution, the deadline is April 15, 2015. Contribution limits go up to $7,550 for someone age 55 or older with family coverage.

Self-employed health insurance. Self-employed individuals can deduct the premiums paid for any medical insurance, dental and long-term care insurance. Policies also can cover the worker’s spouse, dependents, and non-dependent children who were under age 27 at the end of last year.  Medicare premiums paid by self-employed individuals can be taken as an above-the-line adjustment to income. There are some conditions that must be met to claim this deduction; our office can help you report the appropriate amount.

Spousal Support.   Amounts you paid to your spouse or a former spouse under a divorce or separation decree that qualify as spousal support for tax purposes are deductible here.

Other above-the-line deductions include job-related moving expenses and interest payments on student loans. Our office can help you make the most of the various above-the-line adjustments to income on your 2014 tax return.