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Are You Ready for a Casualty (and its paperwork aftermath)?
Nov 10, 2011
The recent asteroid “flyby” has us thinking about casualty losses. When you hear someone has suffered a casualty or that one has occurred somewhere, our brain immediately conjures images that are very grim. We may picture a violent or agonizing death, missing limbs, rubble where houses once stood, crunching sounds of metal striking metal, thousands of acres submerged in water, fires, a brown film covering everything in sight, etc. Anything and everything that is destructive and catastrophic comes to mind, and rightly so. In the context of this article, when we say, “casualty loss,” we are referring to loss of personal property, not human lives.
No one ever plans or schedules to have a casualty occur. By definition, it is an event that happens by chance. You do not know when—or even if—you will experience a casualty. While we cannot avoid experiencing casualties spawned by natural events (hurricanes, floods, wildfires, earthquakes, etc), or man-made ones (theft, arson, destruction of property, etc), we can certainly take steps to prevent a casualty loss from becoming a paperwork nightmare when we prepare our taxes. But how do we do that?
The answers are endless. In some cases, the casualty may be of such inconsequential nature, that it’s just not worth claiming it. Examples of these losses include: a swing set that fell apart, or an old shed you built yourself with very little materials cost, losing a few roof shingles, broken windows, etc. Remember that the only way to claim a casualty loss is to itemize deductions (schedule A). Additionally, the amount of the casualty must exceed two “floors”. Those floors are that it must exceed 10% of your adjusted gross income (AGI) and it must exceed $100. The amount exceeding the floor amounts is what you are allowed to claim as a casualty loss. It is important to note that those floor limitations typically do not apply in presidentially-declared disaster areas (like Katrina, Kansas tornadoes, Midwest floods, etc).
Even casualty losses of relatively big-ticket items could potentially go unclaimed on your taxes if you don’t have enough other deductions to itemize for the year or your income is too high. While most of us can’t do anything about our AGI, if you normally don’t itemize (or are usually a few thousand dollars shy of itemizing), you may be able to vamp up your donations for the year, pay the property taxes early, renew everyone’s eyeglasses/contact lens prescriptions, get Lasik surgery or that dental work your dentist has been recommending, etc. to get your total itemized deductions over the threshold for your filing status and therefore, claim your loss.
OK, so your casualty is large enough (lost the whole house!) that you know you will indeed be able to claim a loss. Now what? Well, this is where preparation pays off. We saw the lack of preparation a lot with Hurricane Katrina claims. Most people were totally unprepared and did not claim all that they really lost. The reason is not that they didn’t want to, it’s that they couldn’t remember what had been lost. When you are unprepared, you are hit totally by surprise.
A hurricane evacuation only gives you a couple of days advance notice (we’re lucky in that aspect—most natural disasters don’t give any warnings), and by that time, there is simply too much “real-world-this-has-to-be-done-right-now” stuff to do prior to evacuating (mainly tracking down important documents, photos, booking hotels, paying upcoming bills, etc). Here comes the hurricane, everything that was not in your car got lost, and we now have a major casualty loss.
The best case that came through our office was that of a couple who actually had a professional service come take an inventory of everything in their house. This had not been done specifically for Katrina, but just as part of their plan of overall preparedness. This return was a very thorough return and everything—right down to those energy curly light bulbs (they were pricey back then)—was able to get claimed on that return.
Of course you don’t need to have a professional service do this for you. You can do it yourself. Go around your house and take pictures of every room. For more detailed photos, stand in the middle of the room and take a picture facing each wall of the room. Do this outside, too. Don’t forget to do the same in your garage and outdoor sheds.
Next, print the pictures. Nowadays, the combination of digital cameras and phones, plus print-it-yourself kiosks at many drug stores really offers you no excuse in this regard. Tape each picture to a piece of loose-leaf paper and label the paper with the room name (den, kitchen, bedroom, etc). If you prefer, get a few of those notebooks that cost 20 cents around going-back-to-school time and label one for each room. If you’re tech-savvy, get that spreadsheet program going and save those pictures in at least 2 separate drives (ex: a thumb drive and your hard disk).
Now, let the preparation begin. I warn you this may be a 2-weekend project for some households, but it is definitely worth it. If you focused solely on doing this one task, it may take an average of 4-7 hours. Get that notebook and draw 3 lines vertically all the way from top of the page to the bottom. This will split the page into 4 columns. In the 1st column, write down all the items that each room contains. In the second column, write down how much you originally paid for the item, in the 3rd, write the date of purchase, and finally in the 4th column, write the fair market value (FMV) of each item. You can check blue book guides and visit local thrift/consignment stores to get close estimates. You can even check out sites like ebay, Craigslist, or Salvation Army to determine these values. IRS Publication 561 is also a good source to further help you with this task.
Inside that notebook, you will also want to put receipts for all major purchases, especially those high-end items likely to be challenged (The Vividus mattress, for example). Once you have the list, maintaining it should be simple as you get rid of, and purchase new, items. Evacuate with these notebooks and other important documents. Consider buying a small fireproof safe to keep these documents (we’re not talking bank vaults, I just saw a briefcase-sized one online for $27—you know you’ve spent way more than that on junk before).
Remember to be specific when filling out your lists. For example, everyone has toothpaste and toothbrushes in their bathrooms. But what else do you have? paper baskets, razors, hair dryers/curling irons, hair gel, skin creams, cosmetics, mirrors, towels, plants, books, expensive prescriptions, different seasonal soap dispensers? What about a 10-jet hot tub or the latest oversized “rainshower” showerhead or jet propulsion powered flushing toilet?
The bedroom? 1 box spring or 2? King or California King? The Vividus, Tempurpedic or no-name? TV, DVD player, movies, stereo, clock radio, curtains, dressers, etc? Would you be able to recall everything that’s in your closets? What about under your bed? Shoes, shirts, pants, hats, belts, stepping stools, hangers, ironing boards, Halloween costumes, early birthday or Christmas presents purchased? In a case of a flood, you could make out what some things were, but a fire would totally destroy any evidence of your belongings.
What about the kitchen? Everyone has a stove, a refrigerator, plates, pots, pans, forks and knives. But what’s in the fridge, though? When people sat down and really went through just the refrigerator alone, they averaged $400-$600 of food lost. How many forks, knives, plates, bowls, though? 2 or 4 Pyrex containers? 1 or 4 crock pots? What sizes? Wood floor or tile? What brands—Wedgewood, Lennox, Royal Copenhagen is different “china” than that whole 16-person plate setting you bought, “made in china,” for $60!
Game rooms/dens/living rooms? Sure they have couches, recliners, end tables and lamps; but what about game systems, Blue Rays, DVD’s VHS tapes, records, sound systems, speakers, game controllers, magazine racks, nice curtains and rods, family games, toys, mini bars, liquor, glassware, mirrors, rugs, paintings, picture frames, vases, souvenirs, etc? That’s at least $2K-$5K
Even a room like “the foyer/hallway” has things. “I just have a coat rack,” you might say. You’d be wrong. Sure, there is the coat rack, but maybe also pictures or paintings, light fixtures, special bulbs ($1 for a 4 pack or $6 each?), type of floor, rugs, fancy molding, etc. Garages don’t just have a washer/dryer, they have laundry detergents, tool sets and chests, containers with seasonal decorations, exercise equipment, water heaters with insulation jackets, freezers, etc. Sheds don’t just have “some tools” and a lawnmower; how about leaf blowers, bicycles, rakes, shovels, hoes, stored above-ground swimming pools, your entire Christmas light display, etc.
Hopefully you see where we’re going with this—document, document, document. You don’t want to rely on your memory alone when you’re sitting in our office or are trying to file a claim with your insurance company or FEMA. Speaking of insurance and FEMA, please realize that in rare cases, you may have a gain due to these reimbursements. You should not “keep that one to yourself.” If you came out ahead, you are supposed to fill out the forms and claim any capital gain and pay the appropriate tax. You don’t want to get that letter from IRS (1 1/2 years after you’ve filed your return, of course) asking about that capital gain on the Rembrandt painting that you bought at a garage sale for $50. By then, you’ve already paid off the house, bought new cars, and taken countless vacations. However, the assessed taxes, penalties and interest will be due in full. Honesty is always the best policy. Remember to bring all your documentation to your tax appointment.
In order for us to properly file the casualty loss, we will need those notebooks, any insurance or FEMA reimbursement reports, appraisals, pictures, etc. in connection with the loss. In some cases, like Katrina, the reimbursement process was a long one and the losses could not be claimed that tax year or the returns had to later be amended after the reimbursements were received (and pay taxes on them).
We pray that those 5-6 hours of time you invest in getting the lists together are all “wasted” time—meaning that you never suffer a casualty—but if you do suffer one, at least you know that your tax return preparation will not add to the misery caused by the casualty loss.
Resources:
Go to the “files” section of our site and review the following; if someone you know has suffered a casualty loss, please direct them to our website so they can take advantage of these files:
* Form 4684 – the actual IRS form to calculate your losses.
* Publication 584 – This is a very thorough workbook that includes common rooms of a house and has common items already listed for you. This is especially good after suffering an event since it helps jog your memory as to what items you may have lost. Your notebooks won’t have the reimbursement and calculation columns, since the notebook purpose is to maintain the log of your items. If it makes you feel better, though, go ahead and modify the above with whichever columns you feel you need.
* Excel file, Excel Casualty Spreadsheet, for those of you who prefer to do in Excel. Modeled after pub 584. Add/delete tabs as necessary. Should print “Landscape” & fit one page.
* IRS Publication 561 – gives guidelines on determining the FMV of your things.
Category: Taxes
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