Posted on | May 1, 2008 | No Comments
By Evelyn Fernandez, Roni Deutch Tax Center
Car accidents are an unfortunate fact of life and like most things, car accidents also have potential tax implications. Below are some helpful hints to decoding the tax treatment of accidents, also known in the tax world as “casualties”:
What does â€œcasualtyâ€ mean?
The Internal Revenue Service (IRS) defines a casualty â€œas the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.â€ Â A car accident is a deductible loss as long as it wasnâ€™t caused by willful negligence or a willful act on your part or someone acting on your behalf.
Proof of Loss
To claim and deduct a casualty loss, youâ€™ll need be able to name and prove the following:
- The type of casualty suffered (car accident, fire, storm, etc.) and when it occurred
- That the loss was a direct result of the casualty
- That you were the owner of the property, or if leasing the vehicle, that you were contractually liable to the owner for the damage
- Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery (think insurance claims)
So how can you prove this? By keeping records. Keep copies of:
- photos of the accident
- police report of the accident
- insurance claim files
- car ownership papers
WHN TIP: Hold on to these records! These are vital in case of an audit to show proof of loss.
Figuring a Loss
To determine your tax deduction for a car accident you must first figure out your loss. Here are the steps to figuring out your loss:
- Determine your adjusted basis in the vehicle (the original cost of the vehicle) before the accident.
- Determine the decrease in fair market value (FMV) of the vehicle as a result of the accident.
- How do you find the FMV? There are various books available from automobile associations that could be useful in figuring out the value of your vehicle (e.g. Kelley blue book).
- These values are not official, but may be useful in determining the value and suggesting relative prices for comparison with current sales and offerings in your area.
- From the smaller of the amounts you determined in (1) and (2) subtract any insurance or other reimbursement you received or expect to receive.
If this is too much to handle, contact a local tax preparer to tackle any questions you might have.
Thanks to Evelyn! Have a comment or question? Post it in the Comments section below.