Tax rules are not on the list of things most people turn to for comfort after a bad day. But they can take the sting out in a few cases. Here are five bad days — and ways that tax experts say you could turn them into a smaller tax bill.
1. Someone stole your stuff
The good news: Theft losses that your insurance company doesn’t reimburse you for could be tax-deductible.
The rub: For personal property, the deduction calculation starts with your “adjusted basis.”
This is typically what you paid for the property. Then subtract any insurance proceeds or other reimbursements. Reduce what’s left by $100 and then by 10% of your adjusted gross income, or AGI.
The loss has to be sizable for the math to work. If thieves steal your uninsured $5,000 ring but your adjusted gross income is $75,000, for example, you probably can’t take the deduction.
Also, you can take the tax deduction in the year you discover the theft, but you’ll need to file an itemized return. Wait if there’s a good chance of getting your stuff back, says Grafton “Cap” Willey, a certified public accountant and managing director at accounting firm Cbiz Tofias. The stolen item could be treated as taxable income if you recover it or get reimbursed for it after you’ve taken the write-off, he says.
2. You were hit by a natural disaster or fire
The good news: Property losses that your insurance company doesn’t reimburse you for may be deductible.
The rub: Calculating this deduction typically starts with finding the lower of these two amounts: what you paid for the property, or the dip in the property’s fair market value after the event. Reduce that number by the insurance proceeds and any salvage value, as well as by $100 and by 10 percent of your AGI.
So if your home is flooded, your insurer leaves you hanging for $50,000 in losses, and your AGI is $80,000, you may be able to ease the sting by deducting $41,900.
Your income is a factor, so a small loss might not get you much tax relief, Willey says. Also, you have to deduct the loss in the year it happened, unless the loss is from a federally declared disaster area. Then the IRS may let you amend the preceding year’s return instead, which could get you a tax refund. Again, you’ll have to itemize deductions.
3. You lent money to someone who never paid you back
The good news: “You potentially have what they call a nonbusiness bad debt,” Willey says. You report it as a short-term capital loss on your tax return. Also, you don’t have to drag your friend or relative into court if you can show that a judgment would be uncollectable.
The rub: “You’re supposed to have a written note for any transaction like that,” Willey says. The loan should have carried a realistic rate of interest, and you should have made reasonable efforts to collect the debt, he adds. You’ll need to attach a statement to your tax return explaining each bad debt and efforts made to collect it. Also, you have to take the deduction in the year the debt becomes worthless — though you don’t have to wait until the loan is due to determine that the money will never be returned.
4. You gambled and lost
The good news: You may be able to deduct your gambling losses if you itemize your deductions when you file your tax return.
The rub: “Gambling losses are deductible only to the extent of gambling winnings,” Willey says. That means spending $100 on lottery tickets isn’t deductible — unless you win, and report, at least $100, too. You can’t deduct more than you win.
5. You sold your stock investment at a loss
The good news: You may be able to deduct some or all of that loss, says John Piershale, a CFP and wealth adviser with Piershale Financial Group. The IRS lets investors use capital losses to offset taxable capital gains, which means a $5,000 loss on a stock you bought could offset a $5,000 capital gain if you also happen to sell a winner the same year.
The rub: If your losses exceed your gains, you could deduct the difference, but only up to $3,000 per year ($1,500 for those married filing separately). However, you might be able to carry the rest forward and deduct it in subsequent years, Piershale says.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: [email protected].
This article was written by NerdWallet and was originally published by The Associated Press.