Is Uninsured Theft Loss Tax Deductible?

Theft

The federal tax law defines a theft as the taking of property or money by a person with intent to deprive another of the property. The taking must be illegal under the applicable state law and be punishable as a crime. However, it is not necessary that you identify the thief. Common occurrences of theft include blackmail, burglary, embezzlement, kidnapping for ransom, extortion, larceny and robbery. Money or property obtained through fraud or misrepresentation is deemed a theft for deduction purposes if it is illegal under the applicable state law.

Money and property that you misplace or accidentally lose is not considered a theft, even if another person discovers it and fails to return it. However, the loss may be eligible for a casualty deduction if it is due to a sudden, unexpected or unusual identifiable event, such as a robbery. For example, if you forget a wallet containing $1,000 at the counter of a department store, and the person standing behind you takes it after you leave, the loss is not deductible as a theft. However, if the person threatens you with physical force when you return to collect the wallet, the loss rises to the level of a theft and is deductible.

Taxpayers have the burden of proving the property loss is the result of theft and must substantiate the monetary amount of the deduction. To meet this burden, the IRS requires you to show the precise time of loss and provide proof that you are the rightful owner of the property. If you are unable to provide detailed records of the event and the property, the IRS can consider other types of evidence supporting the deduction.

The deductible loss for stolen money equals the amount of money you cannot recover. For property thefts, you must determine its basis. A property's tax basis is equal to its purchase price plus the amount of sales tax and transport fees you pay. Next you must determine the decrease in fair market value of the stolen item. For example, if you pay $150 for a collectible coin that is worth $1,000 when the theft occurs, the decrease in fair market value is $1,000. However, the amount you can deduct on the return is $150. The IRS further requires that taxpayers do not receive a reimbursement from an insurance company if taking the deduction. All insured property that is stolen is ineligible for the deduction.

You must reduce each theft loss by $500 prior to taking the deduction. The $500 reduction is based on each event, and is deducted once from the total losses that result from a single theft. After applying the reduction, you must further reduce the annual loss by an amount equal to 10 percent of adjusted gross income. The result is the amount you can deduct on a tax return.