Lessons on Casualty Losses From the O.J. Case and Others

You can hold off on claiming a casualty deduction if you expect to be reimbursed but are not, or if you don't realize until the following year that damage was done. (And there are a slew of rules that apply only when your loss is from a disaster that the president has declared warrants federal assistance.)

If you didn't claim a casualty loss deduction because you expected insurance to cover the damage, but a year later discovered it would not, claim the deduction in the year the issue is settled with the insurer. In other words, whenever you find you have no reasonable prospect of recovery, that's when you claim the loss.

Theft

Theft losses and casualty losses are essentially figured the same way. The test for claiming a theft loss, though (again), seems more straightforward than it often is. Clearly, the loss of property must be due to an illegal act. Missing property should have supporting evidence that a crime was indeed committed -- witness reports, police records or even a newspaper account of the crime.

Money lost through fraud is also deductible as a theft loss. When a building contractor took off with a payment he received to build a residence, the would-be homeowner was allowed a theft loss deduction for the difference between the money in advanced to the contractor and the value of the partially completed house.

In a slightly more bizarre example of the same principle, a New York taxpayer who was suffering from depression and became attached to two fortune tellers was allowed to claim a $19,000 theft deduction. Under New York law, fortune-telling is considered a theft-related offense (unless it's at a show or fair for purely entertainment purposes). A gullible (or, I suppose, a depressed) person who thinks they will be helped by fortune-telling services has been duped or swindled; therefore a loss could be allowed in New York.

If your stolen property is recovered or the money is returned, you'll need to refigure your loss deduction and file an amended return. To recalculate the loss, go through the steps on Form 4684, but compute the loss in fair market value from the time the property was stole until you recovered it.