IRS Misleading (Casualty Losses)

I have no idea how many people are signed up for and get regular email blasts from the IRS. (The IRS does not use email to contact individuals about their tax situation. If you get such an email message you can anticipate that it is phishing - do not respond.) Today I received a regular email blast message. I think it is misleading.

The IRS email blasts are generally helpful information although not often that helpful for tax professionals. Still, there are always opportunities to learn, so I receive and skim them for valuable nuggets.

Today's email blast deals with miscellaneous deductions, which is one area where we can itemize deductions to potentially reduce our tax liability. Other areas include medical expenses, state and local taxes paid, interest related to a mortgage on our personal residence or investments, charitable contributions, and casualty losses. Miscellaneous itemized deductions are separated into two groups - those subject to a limitation to the amount that exceeds 2% of our Adjusted Gross Income (AGI), and those that do not suffer this "hurdle" or "haircut."

Why do itemized deductions only potentially reduce our taxes? The laws created by Congress allow for a "standard deduction." Essentially we can deduct that amount without bothering to itemize and detail those deductions for the IRS. Only if we have a larger amount when itemized is it advantageous to "itemized deductions" on our tax return. (At one time this was referred to as the "long form.")

Enough background. What was misleading? When listing items that may be deducted as a miscellaneous deduction not subject to the 2% rule, they included casualty losses. Really?

Casualty losses are separately listed unrelated to the miscellaneous area. But we do not receive the benefit of the full loss. First, each separate loss from the year receives a $100 "haircut." So if your loss is $3,700, it is first reduced to $3,600. A second loss in the year of, for example, $4,200, is reduced to $4,100. So far so good.

But then the total of all losses are reduced by 10% of your AGI. So in our example the $3,600 and $4,100 is combined to equal $7,700. If your AGI is $40,000, then 10% is $4,000. So the $7,700 is reduced to $3,700. This is the amount that is figured into your itemized deductions.

So why do I see the email blast as misleading? The author of the email blast was focused on the miscellaneous deductions. In offering examples of those items that escape the 2% rule, they included casualty losses. While it is technically true that casualty losses escape the 2% rule, they have their own 10% rule! That is considerably less advantageous.

The "mistake" was in considering casualty loss to be a miscellaneous deduction; it is not - casualty losses are listed elsewhere on Schedule A Itemized Deductions. I doubt this will send too many taxpayers running too far in the wrong direction, but I think it best to at least start taxpayers going the correct way. But please, there is no reason to think the error was malicious; I think it was simply an error the author made while focused on the area of miscellaneous deductions.