Archive for the ‘Schedule D’ Tag

Back to Basics – Part XVIII – Form 4684 – Casualties and Thefts

July 10, 2015

My colleague next door enjoys kidding me every two weeks when my next installment of Back to Basics comes out!  Although there will not be 10,000 parts as he suggests, there could be!  CCH, one of the leading publishers on tax research materials has about 75,000 pages in its Standard Federal Tax Reporter – a product which includes the code, regulations, court case cites, commentary, and other related information.  So, if I cover it in 35 articles or so, I probably can’t even call it the “basics” – maybe introductory remarks would be more fitting!

Nonetheless, it is designed to be an overview for commonly used Schedules and Forms.  It is also interesting to note with today’s connectivity that people all over the country and the world find the articles reposted on my website and I regularly receive calls and e-mails.  Earlier this week I received this response, “Just wanted you to know how much I enjoyed your blog. I wish you were in my hometown in Louisiana!”  Thanks for the message, Dianne!

This week we will touch on Form 4684 – Casualties and Thefts.  If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog .

Casualty and theft sounds like language stolen from an insurance agent, and like a good insurance agent, Uncle Sam wants to help you too…sometimes.  If you have a large personal financial catastrophe resulting from something like a fire, storm, wreck, robbery, embezzlement, etc. you can claim the loss on Form 4684.  Hopefully you have insurance, but if not, or to the extent that it is not covered, such as your deductible, you can claim the unreimbursed portion on this form.

The wheels are already turning – “Wow, I have had several car accidents in the past and I had to pay a $500 deductible – you mean I could have claimed that?”  The answer is, “Yes.”  However, it likely would not have done you any good since the loss of personal use property has to be in excess of 10 percent of your adjusted gross income (AGI) plus $100.  That is a relatively big number for most people.  If your AGI is $100,000, for example, that would equate to a $10,100 out-of-pocket loss threshold.   Everything over that amount would then go to Schedule A as an itemized deduction.  But, if you are retired and not actively earning income that threshold could be much smaller.

Q. “What about a stock market crash, where my portfolio drops by 40 percent – can I claim my losses from that as a casualty/theft loss?”  A. – If you have not sold anything, then no.  When you do sell, that loss gets reported on Schedule D instead along with gains and losses from capital assets.

Q. “I parked my Ferrari at a sports event and my insurance had lapsed.  There were so many parking lots, I never could find it.  Can I deduct that loss?”  A. – Losing or misplacing money or things (stupidity) is not deductible.  Hopefully you will have realized it was stolen, filed a police report, and then the answer would be, “Yes,” assuming there was no reasonable expectation of recovery.  If you claim the loss on your tax return, and then two years later the police locate it three states away you would then have to claim it as income when recovered.

Q. “I have been using my yacht for twenty-five years and it has finally worn out and has stopped working.  Can I claim that as a loss?”  A. – Wear and tear and breakage from normal use are not deductible.

The area where I have seen Form 4684 actually come to significant aid for taxpayers over the years has been regarding financial theft.  It is often large and there is generally no insurance reimbursement.  Caretakers that get access to accounts, telephone or e-mail scams, and Ponzi schemes are all examples of items that find some relief on the 4684.  Local residents may recall Jay Zubick’s $16 million financial investment scheme in Monterey in 2007.  Cedar Street Funding would be another example, as well as Bernard Madoff’s massive national scam.

Ponzi schemes are considered business or investment losses since the original intent was to earn a profit.  As such they are not subject to the 10 percent threshold.  The same would be true for other casualty/theft losses related to business or income-producing property.  Caretaker financial abuse, telephone and e-mail scams bilking people out of their personal financial resources, however, are theft of personal assets, and the 10 percent threshold would apply.

Anyone who uses e-mail regularly has no doubt received a fake e-mail from a friend that is stranded in another country and needs money ASAP.  This type of fraud would certainly go on the Form 4684. The IRS has warned of numerous scams of people posing as IRS collections agents.  Sometimes scams are quite elaborate involving long time periods and multiple con-artists all painting a picture of legitimacy.  Fake lottery and other winnings are common fodder for scams where they claim money is needed for fees to transport cash across state borders, or to pay taxes.  Often the scammers will start with requests for small amounts of money.  They are probing for susceptible people.  When they find someone who bites, they start working other scams and raising the stakes each time to soak you for more money.

I have had several occasions to work with people that have had hundreds of thousands of dollars stolen through such means.  In these situations, the Form 4684 allows the taxpayer to get a large deduction which can even create a net operating loss on the current year tax return.  This net operating loss can then be carried back several years to recoup past taxes paid and/or carried forward to the future to reduce taxes then as well.

The Form 4684 is a three-page form.  The first page deals with casualties and thefts related to personal property, and helps you calculate the amount of loss after the 10 percent plus $100 deduction to carry to Schedule A as an itemized deduction.

The second page helps you calculate the losses related to business or income-producing property.  Depending on the exact type of business or income producing property, the loss could carry over to the Form 4797 and eventually make its way to page one of the Form 1040 and directly offset ordinary income and lower adjusted gross income.  Other types still go to Schedule A where they may not be quite as beneficial, but still helpful.

The third page deals specifically with Ponzi type schemes.  Note that there are many types of financial investment schemes out there, but to be deductible on the Form 4684 as such, they must fall under the definition the IRS uses.  There are also special ways to calculate the losses since Ponzi schemes generally wind up in court for years while the records are sorted out and funds are attempted to be recovered.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Back to Basics – Part VIII – Schedule D

Originally published in the Cedar Street Times

January 23, 2015

Imagine yourself on Antiques Roadshow and they tell you that an old porcelain mug you found in your attic last summer is worth $8,000-$10,000 dollars!  You are of course elated, and decide to sell the mug.  Fast forward to February, and your accountant starts asking you questions about this sale, such as your adjusted cost basis and your holding period.  You really have no idea how you even got it.  You know it was in the family for a long time, and you think that maybe it was in a box of things your mom left for you when she moved to Palm Springs where she now resides.  What do you do?  I don’t know exactly, but I know this much – it will go on your Schedule D in some form.

In this issue, we are discussing Schedule D – Capital Gains and Losses.  Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.

Schedule D is used to report gains or losses from the sale or exchange of capital assets.  Capital assets consist of a variety of things.  The personal use items you own – such as your home, your vehicles, household items etc. are capital assets.  Gains from the sale of personal items are taxed.  Losses, however, are generally disallowed. Your personal investments such as stocks, bonds, or real property held as an investment are also capital assets.  Gains and losses are allowed on personal investments.

The same types of items used in your trade or business, however, would be reported on a Form 4797 and would be taxed differently as well.

Assets that have a mix of personal use and business use can have elements reported on both forms.

To determine your gain or loss on a capital asset, you must know your cost basis in it.  If it is something you bought, your cost basis is generally the amount you paid for it; if it is something you inherited, your cost basis is often the fair market value at the date of death; or if it was something given to you, your cost basis is generally the same as that of the prior owner.

There can also be adjustments to this basis, such as when you make improvements to your home – the money you spend would be an adjustment upwards.  Once you know your adjusted cost basis, you simply subtract it from the sales price to determine your gain or loss.  If you scrapped it, your sales price is zero.  Sometimes it can be quite challenging to determine the cost basis, especially if records no longer exist.  Technically, if you cannot prove your basis, the IRS can take the position that your basis is zero.  This could be very unfavorable, especially if you just sold a $10,000 mug with unknown origins!

It is also important to know the length of your “holding period.”  The date you purchase the property is generally the beginning of your holding period and the date you dispose of the property is the end of your holding period.  For property received as a gift, you include the holding period of the person who gave it to you.

If your holding period is over a year, it is subject to favorable long-term capital gains rates – basically a 15 percent federal rate for most people.  (Although it could be as low as zero percent or as high as 20 percent depending on your tax bracket and the amount of capital gains you have.  Also, collectible items you sell such as old coins or antique vehicles are taxed at a 28 percent rate.)  If your holding period for the asset is a year or less, it is considered a short-term holding and is taxed like ordinary income (a higher rate for most people).  Inherited property is always considered to have a long-term holding period.  California does not have a special rate for long-term holdings and treats all capital gains as ordinary income on its tax return.

As mentioned before, there is no deduction for losses on your personal use items.  You can, however, take a loss on your personal investments.  They would reduce any other capital gains, first, and then if there are still losses remaining, you can use $3,000 to offset any other type of income you have on your tax returns.  The rest would get carried over to future years.

The Schedule D itself is essentially a summary of capital gain and loss activity that are mostly determined by other forms that feed into the Schedule D.  Part I summarizes short-term gains and losses, and Part II summarizes long-term gains and losses.  Form 8949 is the main supporting form used in both of these sections.  It was added a few years ago after changes to broker cost basis reporting requirements occurred.  The Form 8949 sorts out long-term and short-term transactions for which cost basis is reported to the IRS and not reported to the IRS, and handles the actual transactional reporting.

Parts I and II also have areas were short-term and long-term gains can be reported from other forms such as installment agreements, business casualty and theft losses, like-kind exchanges, as well as pass through entities such as partnerships, S-corporations, estates, and trusts.  Long-term capital gains distributions from mutual funds on a 1099-DIV are reported in Part II.  (Short-term capital gains distributions from mutual funds are actually included as ordinary dividends on the 1099-DIV, and are reported on Schedule B instead.)  In addition, short-term and long-term loss carryovers from prior years are added into their respective parts on Schedule D.

Part III nets the short-term gains or losses against the long-term gains or losses.  It then helps you determine the gain or loss to enter on the 1040.  It also walks you through several worksheets to determine the amount of tax and tax rates you will pay on any gains.

So what would you do about the mug?  Hopefully mom would have some recollection of the history.  Maybe there was a somewhat recent time when it was passed by inheritance and would have received a step-up in basis.  Of course, you should have figured that out before you sold it, and then had an appraisal done to support it!  Otherwise, if it had just been gifted from one person to the next, the mug probably had very little if any cost basis, and you might be stuck with a big taxable gain.

In two weeks we will discuss Schedule E – Supplemental Income and Loss.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.