Tax season prep: be sure to factor losses in

Everyone’s favorite time of year, tax deadline, is rapidly approaching. While there are still a few weeks left before it’s time to get out the balloons and party hats, it’s always a good idea to be over rather than under prepared for your yearly taxes. As you’re thinking about the past year, make sure to consider any property losses you may have incurred in 2011. Many people up and down the East Coast suffered losses due to Hurricane Irene, which was by most estimates one of the top ten most destructive and deadly hurricanes to hit the United States since 1980. Irene was a tragedy, but the silver lining is that according to the IRS, losses may well be deductible.
Keeping the terminology clear may help you understand which losses are deductible and which are not. Remember, a casualty occurs when your property is damaged as a result of a disaster such as a storm, fire, car accident or similar event. A theft occurs when somebody steals your property. A loss on deposits occurs when your financial institution becomes insolvent or bankrupt. Any losses incurred as a result of hurricane damage are considered casualties, particularly since Hurricane Irene was one of the many federally recognized disasters in 2011.
However, while losses are deductible, it’s important to know that if you have insurance, you must have filed a timely insurance claim. Any reimbursement you received from insurance must be taken into account and subtracted when figuring your loss. This includes any expected reimbursement even if you have not yet received it. This booklet on Casualties, Disasters & Theft from the IRS (PDF) will help you decide if the casualty, loss and theft deductions apply to you.
Taxes are never fun, but being prepared for all eventualities helps whether the disaster is a hurricane or a Form 1040. Make sure your accountant is aware of any losses you may have suffered in 2011.

Tax reminder: don’t forget to claim any eligible casualty, disaster & theft losses

If you had an un-reimbursed loss of more than $500 due to fire, theft, or natural disaster, you may be able to claim that on your taxes. According to the IRS:

“A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.

A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent.”

Losses that may be eligible include:

  • Un-reimbursed losses due to theft, fire, accidents, storm damage, or similar events if losses are greater than $500 and 10% of your adjusted gross income. (This would include money that you paid in a deductible)
  • Losses that occurred in federally declared disaster areas. See: 2009 Federally Declared Disasters
  • Financial losses due to insolvency or bankruptcy of a bank or financial institution

Types of losses that wouldn’t be deductible:

  • Home or household damage that is gradual, progressive, or the result of normal wear and tear
  • Items that you lose, break, or damage in the course of normal use

If you have insurance, you must have filed a timely insurance claim. Any reimbursement you received from insurance must be taken into account and subtracted when figuring your loss. This includes any expected reimbursement even if you have not yet received it.
To claim a deduction for casualties and theft, you need to use Form 4684. Here are Instructions for Form 4684
For more information:
The go-to source for all information on tax deductions is the IRS. The booklet Casualties, Disasters and Thefts – 2009 Tax Returns explains the tax treatment of casualties, thefts and losses on deposits. It includes the following information:

  • Definitions of a casualty, theft, and loss on deposits.
  • How to figure the amount of your gain or loss
  • How to treat insurance and other reimbursements you receive
  • Deduction limits
  • When and how to report a casualty
  • Special rules for disaster area losses

Don’t get taken in by tax-time phishing via phony IRS e-mails

There’s a group of thieves who are scheming about how to get your personal financial data this tax season and make no mistake about it – they’re good at what they do. Consumer Report’s Money Blog offers this advice: as you plan for tax season: Don’t become a tax-time phishing victim. No matter how authentic an e-mail from the Internal Revenue Service may look, the IRS doesn’t initiate taxpayer communications through email.
Know what you’re up against – educate yourself about phishing
According to Wikipedia, phishing is:

“…the criminally fraudulent process of attempting to acquire sensitive information such as usernames, passwords and credit card details by masquerading as a trustworthy entity in an electronic communication. Communications purporting to be from popular social web sites, auction sites, online payment processors or IT administrators are commonly used to lure the unsuspecting public. Phishing is typically carried out by e-mail or instant messaging,[1] and it often directs users to enter details at a fake website whose look and feel are almost identical to the legitimate one. Even when using server authentication, it may require tremendous skill to detect that the website is fake.”

Some of the best consumer advice and resources can be found at the Anti-Phishing Working Group’s (APWG) site. The following tips are excerpted from their consumer guide on how to avoid phishing scams:

  • Be suspicious of any email with urgent requests for personal financial information
  • Don’t use the links in an email, instant message, or chat to get to any web page if you suspect the message might not be authentic – call the company on the telephone, or log onto the website directly by typing in the Web address in your browser
  • Avoid filling out forms in email messages that ask for personal financial information – you should only communicate information such as credit card numbers or account information via a secure website or the telephone
  • Always ensure that you’re using a secure website when submitting credit card or other sensitive information via your Web browser
  • Consider installing a Web browser tool bar to help protect you from known fraudulent websites
  • Regularly log into your online accounts to ensure that all transactions are legitimate
  • Ensure that your browser is up to date and security patches applied
  • Always report “phishing” or “spoofed” e-mails to the following groups: forward the email to; forward the email to the Federal Trade Commission at; when forwarding spoofed messages, always include the entire original email with its original header information intact

Additional resources
FBI’s New E-Scams & Warnings
How to spot a fake website and not get phished
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