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Which Form to Use When Filing Tax Return

February 29, 2012 By

The 2012 tax season is here with us again and by April 17, 2012, taxpayers seeking to beat the first deadline of tax returns will need to have filed their return. The extension from the traditional 15th date was made as April 15th is a Sunday and Monday the 16th is a holiday in Washington D.C. 2012 being a leap year also means that taxpayers have yet another extra day this year (February 29th) to prepare their taxes. As usual, those who file for an extension will have until October 15th to file returns.

IRS Not Sending Forms this Year

As most taxpayers have shifted to the e-filing option filing returns with 76% of the filers in 2011 having opted to go for electronic filing, the IRS has chosen to discontinue the mailing of tax return forms to taxpayers. Therefore, do not expect to get any more tax return forms in your mail box. The forms are however, available for those who still choose to file paper return. You may either download the tax return form from the IRS website or call the IRS toll free number to request the form.

Different Tax Return Forms

Taxpayers have 3 tax return form options to use if they chose to go the paper filing way. They can either file their returns on a Form 1040, 1040A, or 1040EZ. The form you use depends on your income, your filing status, and whether or not you want to claim any deductions.

  • Form 1040 – All taxpayers who make an annual income of more than $100,000 must use the Form 1040 when filing manual returns. Others who are required to file using Form 1040 include those who itemize their deductions as opposed to claiming the standard deduction. If you sold a property and made a capital gain, you are also required to file Form 1040. Finally, those who made income through self employment will also need to file using this form.
  • Form 1040A – This form of filing tax returns is simpler and has less entries to make. A taxpayer whose income is below $100,000, who receives some dividend distributions and who has over-the-line adjustments such as a student loan interest deduction or an IRA contribution income can use this much simplified form for his or her returns.
  • Form 1040EZ – The Form 1040EZ is the simplest tax return form and can be used by taxpayers who have an income of $100,000 and below and who have no dependents that they are claiming. The form is only available to those who have a filing status of single or married filing jointly. Furthermore, the amount of interest income that you got in the year of filing should not have exceeded $1,500 when using this form.
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Stay out of IRS Trouble by Submitting your Payroll Taxes

September 7, 2011 By

The current economic recession has had a hard toll, especially on small businesses. Their access to financing and their ability to shoulder tough business seasons are much less than that of bigger businesses. For this reason, many small businesses are being tempted and choosing to skip the remittance of payroll taxes and instead using these funds to work at surviving in the struggling economy. However noble the reasons for defaulting on payroll taxes may be, the IRS is indeed, not happy with this trend. They are now aggressively seeking such businesses and implementing tough consequences for these defaulters. According to tax experts, payroll taxes may lack the urgency of remitting as compared to other business creditors as the IRS does not proactively seek to recover the funds. However, delaying or not submitting the payroll taxes has the potential of bringing your business to a halt. From freezing a business’s account receivables to placing a lien on the wages of staff responsible for remitting the payroll taxes, the IRS can literally cause havoc to your business. It is therefore, advisable to remain in the good books of Uncle Sam.

Report by Treasury Inspector General for Tax Administration on Payroll Taxes

The extent of delayed and non remitted payroll taxes by many businesses was highlighted by a report on payroll tax compliance done by the Treasury Inspector General for Tax Administration (TIGTA) in early 2011. According to the report by this IRS watchdog organization, about $54 billion of payroll taxes are not remitted every year. This is a huge contributor to the tax gap. For this reason, the IRS has taken drastic measures to catch up with defaulters of payroll taxes.

New Approach Taken by the IRS

Following the report by TIGTA, the IRS has randomly picked some 6,600 employers and is auditing them for payroll tax compliance. The IRS states that this is a start and probably, it hopes that the audits will send a warning to any businesses that are still not complying with tax requirements. Some tax experts have seen this move by the IRS as being unfair and harsh, as it sidelines some employers to take the blame of many others who are not complying. Unfortunately, a non-compliant employer is already at fault and lacks any defense and therefore, the employers who are picked in the sample have no recourse for being selected.

Implications of Withheld and Unremitting Payroll Taxes

According to the tax code, the IRS has a right to hold the company responsible for non-remitted taxes. It also has a right to hold responsible the various individuals and entities who have control over the business accounts and who are responsible for remitting the taxes. This includes the accountants, book keepers, treasurers, and owners of the business. The IRS can even hold business creditors responsible for payroll taxes if they prevent the remittance of the taxes by taking control of the business accounts to recover their debts.

When the IRS catches up with a business that has not complied with payroll taxes, they will not only seek the payment of the due taxes, but will also levy the late payment charges that go as high as 25% of the payroll taxes due. The employer is also expected to pay any interests that would have accrued because of the delay in remittance. The amounts due can really sky rocket and can easily drive a business into economic hardship or even bankruptcy. It is therefore, best to pay your payroll taxes within the deadline and to seek compliance as soon as possible if you are already a defaulter to minimalize your IRS problems.

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Top 10 IRS Tax Deductions and Tax Credits in 2011

September 1, 2011 By

The 2012 April tax season that accounts for the 2011 tax year may seem far and most taxpayers may not be overly concerned with their taxes at the moment. However, being conscious of tax matters as the year goes by ensures that you not only have a smooth tax time as you draw close to the next tax season, but also capitalize on the available tax opportunities. The major way in which taxpayers get tax savings from their returns is through tax credits and tax deductions. Below are 10 of the most common tax deductions and credits that you may qualify for in the 2011 tax year.

1. Charity Donations

Donations are the easiest and one of the most common tax deductions. The tax code allows for a tax deduction of donations made to any qualifying tax-exempt organization. In 2011, the IRS released a list of the organizations that had lost their tax exempt status due to non compliance with various regulations. A taxpayer therefore, needs to verify that an organization is qualified as tax exempt to be able to qualify for the tax deduction. For donations above $250.00, you will need an acknowledgment from the organization that you have donated to as support documentation for the tax deduction. For non-cash contributions above $500.00, you will need to file Form 8283, “Non-cash Charitable Contributions Form”. Non-cash items that are above a given threshold will also require a valuation from a qualified appraiser.

2. Child Care Tax Credit

The Child Care Credit is given to parents or guardians who spend money to have their children or qualifying dependents taken care of while they are out working. The credit can be claimed for regular child care or even for a summer day-camp. The amount to claim depends on one’s income and the number of children. The allowed credit ranges from 20% to 35% of one’s income. The credit also has an annual cap of $3,000.00 for a single child and $6,000.00 for more than one child.

3. Mortgage Interest

The mortgage interest tax deduction allows homeowners who are paying for a mortgage to claim a deduction on the mortgage interest paid on their primary residence and qualifying second home. Various rules govern the qualification of primary residence and second home and you will need to ensure that your homes qualify before deducting these expenses. Besides mortgage interest, you can also deduct the real estate taxes paid on non-business property.

4. Medical Expenses

Various medical expenses can be tax deductible for taxpayers who choose to itemize their tax deductions. The qualifying deductions are subject to a threshold of the excess of 7.5% of one’s Adjusted Gross Income. The expenses include travel related to medical care, out-of-pocket medical expenses, and health insurance premiums. For out-of-pocket expenses, there are various items that qualify and you can get a comprehensive list of qualifying medical expenses from the IRS website.

5. Health Savings Account

Contributions to a Health Savings Account (HSA) are also tax deductible. However, the HSA must be a qualify one for the tax deduction. Interests earned from the account are also not taxable. However, for a HSA to qualify, it must be a high-deductible health plan.

6. Work Related Expenses

There are various work related expenses that are IRS tax deductible. Various training expenses, business travel (excluding travel from home to the office), qualifying work uniforms and work clothing, and qualifying entertainment expenses for potential clients are tax deductible, subject to various IRS rules. These expenses only qualify for deductions if they were not reimbursed by the employer.

7. Home Offices

For people who work from their homes, they can deduct various home expenses that are related to their home office. You will need to determine and apportion the home expenses that are attributed to the home office to deduct the costs. The expenses include rent, insurance, mortgage, repairs and maintenance, other related utilities, and depreciation.

8. Qualifying Retirement Savings

Contributions to various qualifying retirement accounts such as 401(k) accounts and IRAs are also tax deductible. For the 2011 tax year, the cap on the contributions to these retirement accounts is $16,500.00. For senior citizens above the age of 50, the tax exempt limit goes up to $37,500.00.

9. Education Expenses

The tax code also allows for tax deduction of various education-related expenses. For the 2011 tax year, there is a cap of $4,000.00 for tax deductions of tuition-related expenses. You can also claim the American Opportunity Tax Credit if you qualify for it.

10. Student Loans

Interest paid on student loans is also tax deductible subject to an annual cap of $2,500.00. This applies only to the interest and not the principal. However, to qualify for this tax deduction, you must be earning an income of less than $70,000.00 for single taxpayers or $145,000.00 for married taxpayers who file their taxes jointly.

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Support Records You Should Retain in Case of an IRS Audit

August 26, 2011 By

Filing your taxes can be such a demanding process and it is quite a relief when the process is over and done with. However, it would be counterproductive to successfully file your taxes only to be unable to prove them in case of an IRS audit because of missing documentation. Therefore, it is important to retain various documentation as long as they are needed. Various support documentation for your tax returns will be required for several and specific periods of time. Some of the documents that you will need to keep are:

  • Tax Return Acknowledgment – A tax return acknowledgment is your evidence that you indeed, filed a tax return. If you sent your tax returns by registered mail, you should keep the IRS acknowledgment receipt for as long as possible. If you submitted returns electronically, print the returns acknowledgment from the IRS website. The IRS can seek an audit for as far back as they wish if you did not file any returns at some point or if you have no evidence for such returns. Therefore, it is advisable to keep these returns acknowledgments as long as possible.
  • Exemption and Deduction Documentation – If you had any tax exemptions or deductions that you claimed in your returns, you should keep any support documentation for at least 3 years (because the IRS may audit your tax returns up to 3 years after your returns). However, if you understated your earnings in your returns by 25% and over, they can seek an IRS audit up to 6 years after returns.
  • Property Purchase or Sales Documentation – If you made a property purchase or sale, you should keep all the sales records, including your sales contract, legal documentations, receipts, invoices, and any other relevant documents. A property purchase or sales IRS audit can go back 4 years and therefore, you should retain these documents for at least that period. Furthermore, such purchase documentation will be needed for property gains tax reduction if you ever sell the property.
  • Bank Records – You should also keep all bank related documentation such as bank statements, credit card statements, electronic banking print outs, and money transfer documentation for at least 3 years from time of filing.
  • Investments Related Records – Besides bank records, you should also keep any securities and investment related documentation such as stocks records, brokerage statements, insurance and mutual funds records, investment product documentation, and any receipts for payments made to these investment managers for the same period of at least 3 years.

It is advisable to keep a storage area where you keep these records that can be required in case of an IRS audit. You can also keep an electronic copy of the documentation for quicker referencing.

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Will Free IRS Tax Preparation Software Save the Taxpayer?

August 25, 2011 By

Every now and then, various lawmakers propose a move to have the IRS provide free tax preparation software to the public to save the taxpayers from the money spent on hiring professional tax preparers. The most recent proposal was advocated by Sen. Mark Kirk and Sen. Dick Durbin in mid 2011. The lawmakers argued that taxpayers spend a lot of money hiring tax preparers and this can all be avoided if the IRS were to provide free tax preparation software to them. However, even though such a move would help many taxpayers prepare their tax returns, there are still some arguments against this line of thought. Some of the arguments posed by the opponents of the proposal are:

  • Complex Tax Code – The tax code has been changed so many times since the tax law was enacted in 1913. In fact, the tax code has been significantly altered 28 times since 1913. Besides the significant alterations, every year, Congress passes various modifications and alterations to specific aspects of the tax code. This has made the tax laws very complicated for the average taxpayer. In fact, some of the tax provisions remain unclear even to tax professionals and the IRS staff. In fact, because this is such a significant issue, the Treasury Inspector General for Tax Administration (TIGTA) releases a report every year that reveals large sums of taxpayers’ money lost annually because of a misunderstanding of the tax code. Therefore, the main reason that taxpayers will go to tax preparers to file their returns is because of the complexity of the taxes (as opposed to the convenience of preparing the taxes via proxy).
  • IRS Budget Cuts – Another argument against provisions of the free software by the IRS to taxpayers is the budget cut on the IRS’s resources. The House Appropriations Committee’s subcommittee on financial services reduced the IRS budget for the 2012 fiscal year. The committee approved a budget lower than that of 2011 on the pretext that the Federal government needed to cut on spending, owing to the large Federal deficit. The IRS may even be forced to cut jobs and to place a hold on its various expansion plans. Therefore, introduction of free tax preparation software for taxpayers may be least of their priorities at the moment. The free software will cost funds that the IRS simply cannot afford to exhaust; they will have to spend more funds to train taxpayers on how to use the free software if such a move were to be commissioned.
  • Too Much Information to the IRS – According to various surveys conducted in the past, many taxpayers avoid any direct interactions with the IRS because of their unwillingness to divulge a lot of personal information to them. Tax-preparation software will require the taxpayer to provide a lot of their financial information to assist them in preparing their tax returns. Therefore, many taxpayers would avoid using the free tax software from the IRS in the fear that the IRS would get too much of their personal information.
  • There is Free Tax Preparation Software Already – Another argument against the launch of free tax preparation software by the IRS is the fact that there is already free preparation software available. The Free File Alliance and Vita Software have been providing free filing services for a while. If software were truly the issue, then many taxpayers would not pay for professional preparers and instead, go for these free software (which is not the case). This underscores the fact that tax complexity, and not software convenience, is the main limitation for taxpayers and highlights their preference to seek professional tax assistance.

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Filing Federal Income Tax is Getting Easier – and it’s Free

August 24, 2011 By

The IRS is making it easier for taxpayers to file their federal income tax returns. This year, you may be able to file your 2010 taxes using free tax software directly through the IRS website.

If you made $58,000 or less in 2010 in taxable income, you will definitely be able to find tax software that you can use on the IRS website. The software is available to certain taxpayers, depending on income, state of residency, and age. You will find the software at http://www.irs.gov/freefile. Some filing options are also available in Spanish.

Once you select which third party company you want to use, you will be directed away from the IRS website and to that company’s website. There, each software program has step-by-step processes to follow to complete your tax return. The software will ask you questions to qualify you for the appropriate tax form, which it retrieves for you to fill out. It will also help you find some tax breaks, such as the popular Earned Income Tax Credit.

98% of Free File users have been satisfied with the product and recommend its use to others. 30 million tax payers have used Free File since 2003. If you combine Free File with direct deposit, you may receive your return in as few as 10 days!

Free File uses secure technology to protect taxpayer information. If you make more than $58,000 or are comfortable filling out the forms on your own without the assistance of tax software, the IRS offers Free Fillable Forms. These forms, also available at http://www.irs.gov/freefile, do not come with software assistance, but do basic math calculations. While some Free File software companies offer state tax return assistance, Free Fillable Forms do not. However, e-filing with this method is free and suits the do-it-yourself taxpayer who prefers paper tax filing.

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Claiming Qualified Long Term Care Expenses as Medical Tax Relief and Deduction

August 19, 2011 By

Under the Federal tax code, long-term care services provided for medical reasons are an allowable expense to deduct. However, according to Sec. 7702B(c)(1) of the Federal law, a licensed physician must prescribe such care as being fundamental for the well-being of the patient. Long-term care deductions allows for people who have chronic diseases and conditions of incapacitation to receive long-term care, including an attending nurse or caretaker, without paying taxes for such services. There are various rules and qualification guidelines that govern the application of this IRS tax deduction.

Qualification Requirements

The long-term medical care can only be claimed by taxpayers who itemize their tax deductions as opposed to using standard deductions. You therefore, need to use the right Form 1040 to benefit from these long-term care expenses and have them deducted. The expenses also need to have support documentation. The person claiming the deduction must maintain the doctor’s statement that prescribed the long-term care, including the diagnosis of the medical condition. Besides the doctor’s statement, one also needs to keep the receipts or payment vouchers for such medical care. All other tax requirements, including withholding of taxes for any employees involved in the long-term care, need to be adhered to.

Itemized Deduction

Itemizing of tax deductions is more complex than taking the standard deductions route. A taxpayer itemizing deductions needs to schedule all the tax-deductible medical expenses that need to be itemized and determine if the expenses exceed 7.5% of his or her Adjusted Gross Income (AGI). Therefore, for itemized expenses to qualify for deduction, a taxpayer must have above this 7.5% threshold in total medical expenses. There is however, no cap or maximum for these itemized deductions.

Case in Point – IRS vs. Estate of Baral

In some instances, the IRS has differed views with taxpayers on what qualifies as long-term care as prescribed by a physician. This was the case for Lillian Baral, who had been diagnosed with dementia. The doctor recommended long-term care and Baral’s brother, who was her financial trustee, employed two caretakers to attend to her. The condition of her illness deteriorated her mental and physical capacity and she finally succumbed to her infirmity in 2008. Due to her condition, she did not manage to file a return in 2008 for the 2007 tax year. Since no tax return was filed, the IRS decided to use their estimate and determined that she had earned incomes of $94,229.00 and had underpaid taxes by $17,681.00. However, in their calculations, the IRS did not allow for the inclusion of her long-term care expense – Baral’s brother had paid $49,580.00 to the caretakers and had also reimbursed expenses of $5,566.00.

The issue was referred to a tax court to determine if the IRS was just in their actions. In the ruling, the court held that the wage payments to the caretakers qualified as long-term care for tax purposes and that the IRS was out of order to have these expenses excluded for tax deductions. The court however, held that the reimbursed expenses could not pass for the deductible of long-term care expenses as there were no receipts (support documentation) to support these expenses.

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Happy Ending to an Eliminated IRS Tax Burden for Hero Baseball Fan

August 16, 2011 By

If you are not new to baseball, then the remarkable 3,000th hit by Derek Jeter of the Yankees is no news to you. This remarkable hit by the professional baseball player made him the only Yankee player to ever hit this mark and one in only 28 players to have ever gotten that far with batting. This hit made Jeter join other baseball icons such as Ty Cobb, Hank Aaron, and George Brett, who have made it that far with their hits. However, Jeter was not the only one who went home a winner after that game. The hit ball from this remarkable bat by Jeter was caught by Christian Lopez, a Yankee fan, from the left stand and he too, immediately joined in the fame. After the catch, Lopez was ushered to the Yankee’s President’s Office where he was honored for being lucky on this historic hit. He willfully chose to return the ball to the Yankees to be placed as a monumental gift for their wall (as opposed to selling it off as a memorabilia). For this noble act, the President of the Yankees offered Lopez some autographed memorabilia of baseballs, bats, and some Yankee gear. He was also offered season tickets for executive box seats for the rest of the 2011 home Yankee games.

However, before Lopez could celebrate these awards, the reality of taxes for the gifts was already beckoning. In America, prizes are taxable under income taxes while gifts are taxed on the giver as opposed to the receiver of the gift. Immediately after the events that followed this remarkable hit, the media and various tax blogs across the internet went out speculating on the possible tax liabilities due and whether Lopez was really lucky to have caught the ball. On his end, Lopez said that he was proud to have caught the ball and said that he was unwilling to sell any of his souvenirs to pay off his taxes. He hoped that his parents would meet any taxes that would be due from the catch.

The big question that was at hand was whether the items given to Lopez were actually a prize or a gift. If the items offered by the Yankee President were considered gifts, then the Yankees was bound to pay IRS taxes against such gifts. However, if the items were a prize for both catching the ball and for the noble act of returning the ball to the Yankees, then this can either be considered under income tax as a prize or as a trade and therefore, taxed under sales tax. Either way, tax experts had projected that a tax of an amount between $5,000.00 and $14,000.00 would have to be paid to Uncle Sam one way or another.

However, recent events have concluded this legendary baseball event with a happy ending. Miller High Life, through the Miller Brewing Company, said that they are offering to pay off any tax implications that would arise for Lopez. In a press statement, the brewing company stated that it was not right to punish a person like Lopez who had not only contributed to the fun of the game, but was also a real hero from the whole incident. With this offer from Miller, Lopez can take a breath of fresh air in relief. The speculation about the tax liabilities and the anxiety of receiving a hefty bill from the IRS are now over. However, the Miller Company will need to gross up this tax payment gift or else, Lopez will be left with a new tax burden of paying taxes for this Miller tax payment gift!

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Continuing Fight for Inclusion of Same Sex Marriage to the IRS Tax Code

August 15, 2011 By

According to the Section 3 of the Defense of Marriage Act (DOMA), a marriage for Federal purposes is a legal union between a man and a woman and “a spouse” refers to a person of the opposite sex. The Federal law therefore, does not recognize same sex marriages in spite of many states legalizing the same. However, the exclusion of same sex marriages in the Federal law has been a debate over the years. Many have argues that the DOMA is unconstitutional and that it violates the rights of citizens. This is especially the case in taxes, as same sex marriage partners are not allowed to file IRS taxes jointly (as is the case with their heterosexual counterparts).

There are several civil rights activists who are pushing for the inclusion of same sex marriage into the Federal law. Activist groups such as “Refuse to Lie” advocate to their followers to indicate in their tax returns that they are married according to the state law and file separately only because the Federal law requires so.

Besides such activist movements, there are also pending court cases that challenge the constitutionality of the DOMA. The Department of Justice under the Obama administration, which is the guardian of the Federal law, has chosen not to defend the DOMA and instead, has opted to agree with the opponents that indeed, the DOMA is unconstitutional. This has left conservatives with the tough task of defending the DOMA outside government help. The court cases are still pending in court. Besides these legal battles, there are also further developments that have worked to complicate the position of the IRS to turn down a same-sex-marriage option to file jointly.

In 2011, New York joined the band wagon and legalized same sex marriages in the state. However, the legalizing of same sex marriages in New York has a twist that makes the DOMA stand on marriage even more complicated. The New York same sex law does not require any residence status in New York. This means that citizens of the U.S. from other states can come into New York, get married (as same sex couples), and go back to their states of residence. Given that New York is a major state in America, this means that same sex marriage will proliferate, even in the conservative states that still uphold heterosexual relationships only. According to analysts, this “no residence” aspect will increase the pressure against the legality of the DOMA.

One of the activists at the helm of the fight for the inclusion of same sex marriages into the Federal law is William Stevenson. Stevenson is a member of both the IRS Commissioner’s Advisory Group and the National Council for Taxpayer Advocacy. He is also the president of the National Tax Consultants, an advocacy organization operating from Merrick, New York. Stevenson has been in the forefront of fighting for various taxpayers’ rights in the past with considerable success. Therefore, supporting the action for inclusion of same sex marriages into the Federal law from a tax perspective has been seen as a great plus for the DOMA opponents. As part of his activism, Stevenson is now circulating a letter that is challenging the IRS on its stand against same sex couples filing jointly. In his letter, Stevenson highlights the plight of the new New York law that provides for non-residency in the same sex marriage law and the tax disadvantages that the same sex couples have in comparison to heterosexual couples. One of the main disadvantages for same sex couples is being excluded from the advantages of the Estate tax law for married couples. The Estate Law allows spouses to transfer wealth between each other with no tax implications, which can be a huge tax saving.

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Casualty, Disaster, and Theft Tax Deductions – IRS Help Available

August 12, 2011 By

The casualty, disaster, and theft tax deduction is becoming a popular tax relief for many taxpayers, especially with the bad weather that has hit various parts of the United States and as theft becomes more sophisticated with technological advancements. This relief for losses allows taxpayers who have undergone sudden losses through theft or accidents to get tax deductions for the losses.

History of the Disaster-Related Tax Deductions

Tax relief for business and individual losses goes far back beyond the current tax code. As far back as 1867, the then-tax laws allowed for victims of ship wrecks to claim deductions against such losses. Since then, the occurrence of various disaster and loss events has triggered the inclusion of other items to this loss relief law. In 1870, after the Harpers Ferry Flood, the tax code introduced floods as a deductible loss. In 1916, theft and other casualty losses were introduced into the law. Since then, the law has been adjusted to include losses for bank insolvency, different kinds of thefts (including ransom and information theft), and other bad weather disasters.

The Current Tax Code on Casualty and Disaster

The current law on the casualty, disaster, and theft tax deduction provides various qualifications for anyone seeking to make a claim. Some of these qualifying rules are provided below.

  • Unprecedented Loss – For a loss to qualify for the deduction, it has to be sudden and unprecedented. Losses such as wear and tear or losses that occur gradually cannot qualify. The claim is available to both individuals and businesses. Some of the losses that will qualify include theft of personal property, ransom, accidents, losses from bad weather such as hurricanes, losses from volcanic activity, terrorist attacks, blackmail, identity theft, cyber hacking, loss of bank deposits through insolvent banks, and employee embezzlement.
  • Net of Insurance – If the qualifying loss was insured at the time of event, the taxpayer cannot claim a deduction. However, if the insurance for whatever reason declines to make a reimbursement, you can go ahead and claim a deduction. If you get partial compensation, you can make a deduction on the uncompensated amount.
  • Timing of Claim – A taxpayer making a claim for the loss deduction can only do so in the same year that the loss occurs. However, for Federally declared disaster areas, the taxpayers can make the claim up to the year preceding the disaster event.
  • Itemized Deduction– Taxpayer seeking to make a deduction for the casualty, disaster, and theft claim can only do so if he or she itemizes deductions. In this case, one has to use Schedule A of the Form 1040. The taxpayer can only claim what is in excess of a $100 threshold and being an itemized deduction, one has to claim the itemized deduction amount that is above 10% of their Adjusted Gross Income.

The tax code has, over the years, introduced specific and temporary laws to provide extra relief for victims of specific catastrophes. Going forward, the casualty, disaster, and theft tax relief is set to keep changing even as theft, crime, and disaster takes new and various shapes as the years go by.

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