Income tax deduction helps ease burden of uninsured losses for householders

Current tax deduction guidelines for use by agents, brokers and adjusters have become a priority in the wake of recent disasters, notably widespread, prolonged flooding around the country. The deductions allowed by the Internal Revenue Service can be a lifesaver for people in flood-prone areas who still do not carry flood insurance, despite the ongoing efforts of their insurance providers to stress that homeowners policies do not cover the peril.

The tax deduction guidelines also can be useful in loss situations other than major catastrophes. For example, classes of unscheduled personal property, such as jewelry and stamp collections, account for theft losses of major proportions. Damage to personal property of a kind not included in the familiar Coverage C named perils is another example.

Underinsurance on a dwelling can result in a major uninsured loss, even though the cause is a covered peril. Minimum coverage, or none at all, for required compliance with a building code when rebuilding after fire or windstorm, may be helped by following the tax deduction route.

The Internal Revenue Service has established rules and procedures for deducting uninsured losses arising from "casualties, disasters and thefts..." In this context, "casualty" is defined as "the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual." The IRS states that deductible casualty losses may result from a number of different causes, including (but not limited to) earthquakes, tornadoes, floods, storms, volcanic eruptions, shipwrecks, mine cave-ins, sonic booms, vandalism, fires and car accidents. Indirect expenses that follow, such as additional living expenses and property protection, also are deductible.

The procedure requires the filing of Form 1040 and the itemizing of deductions on Schedule A, subject to deductible and gross income limitations. Uninsured casualty or theft losses may be deducted by a taxpayer only to the extent that (a) the amount of each separate casualty or theft loss is more than $100 and (b) the total of all losses during the year is more than 10% of the adjusted gross income reported on Form 1040. Form 4684, "Casualties and Thefts," must be completed to compute the loss and must be attached to the return. The amount of the loss is entered in Schedule A of Form 1040.

Insurance or any other type of reimbursement, whether received or anticipated, must be subtracted from the loss when figuring the deduction. It is important that an insurance claim be made promptly for a covered loss. The covered amount above a policy deductible may not be deducted under a tax return, whether or not the taxpayer makes an insurance claim for it. An itemized inventory of personal property is of great value, as satisfactory evidence is required to support a deduction for a casualty or theft loss. A booklet for the purpose, supplied by an insurance agent or broker and completed by the insured in advance of loss, augmented by bills of sale and appraisals of valuable items, goes a long way in achieving a sound insurance settlement or supporting a tax deduction.

A video or photo inventory of a home and its contents documents losses with the greatest possible accuracy. The picture record is especially significant when it includes shots taken after loss as well as before. It is helpful in establishing the condition and value of damaged property. Recommended pre-loss pictures include: Interior shots of furnishings; close-ups of jewelry, paintings, art objects and the like; photos of vehicles; exterior shots of house and grounds.

Publications, available from the Internal Revenue Service without charge that are helpful with respect to the procedure for claiming deductions for uninsured casualty and theft losses under personal returns, include: Publication 547, "Casualties, Disasters and Thefts" (revised November 1996); Publication 551, "Basis of Assets"; Publication 584, "Nonbusiness Disaster, Casualty and Theft Loss Workbook." Having copies of each of these publications on hand would allow an insurance office to acquaint a concerned insured with them in a timely fashion.

The tax deduction process is a significant supplement to insurance carried by families and individuals. It can be vital when an uninsured property loss of a catastrophic, financially ruinous nature occurs. Disastrous floods reveal that many families involved have not carried flood insurance, though the picture is improving.

An occurrence need not take place in what is declared a federal disaster area for the tax route to be a lifesaver. Illustration: Early in my career, when in agency work, I arranged a homeowners policy for a former army buddy. His home was burglarized, and a substantial amount of jewelry belonging to his wife was taken. I was unaware of the exceptionally high value of the various items, and had not inquired about such property when the policy was renewed. Furthermore, I had known that the limit of coverage for unscheduled jewelry had been reduced, in the revised edition of the homeowners form that was used, from $1,000 per item to a modest amount for all jewelry taken in a single theft.

Fortunately, I was acquainted with the federal tax deduction for uninsured casualty and theft losses. It was put to use with good results. I pass the experience on to newcomers in the profession with the counsel that you periodically inquire about the acquisition of valuable items of personal property and keep abreast of changes in insurance forms.

Copyright Rough Notes Co., Inc. Apr 1997
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