These Money Losses Won't Help You at Tax Time
Capital losses on the sale of a personal residence are just one provision of the tax code that gives no relief to struggling taxpayers. Let's take a look at three other situations in which the tax laws prevent you from claiming the full amount you lose on your tax return.
1. Losses Related to Theft, Natural Disasters or Other Catastrophic Events
The tax law allows you to deduct what it calls casualty, disaster, and theft losses that affect your home, your vehicles, and any household items you own. As you'd expect, you're not allowed to deduct losses that get reimbursed by any insurance coverage you have, with any claimable amount limited to what you have to pay out of your own pocket. Allowable losses include those caused by floods, hurricanes, tornadoes, fires, earthquakes, or other natural disasters, as well as criminal activity. Being in a federally declared disaster area can be a good supporting factor in claiming a loss but isn't a necessary condition.
The problem with these losses, though, is that below a certain amount, you're not eligible to claim a loss. For each event, you can't take a tax loss on the first $100. More important, you also have to reduce the amount of the claimed loss by 10 percent of your adjusted gross income. Only then can you include the loss as an itemized deduction on your return.
In simpler terms, what this means is that if you regularly use the standard deduction or if your income is high enough, you'll often not be able to include any casualty loss amount on your return. Even if you do get to take some deduction, it will often be just a fraction of your true out-of-pocket loss.
2. Capital Losses on Investments Above a Certain Amount
The rules on claiming capital losses on investments are much more lenient than those covering personal real estate. There's no limit on how much in capital losses you can use to offset any capital gains you have. However, there is a limit on the amount of investment-related capital losses you can claim against regular income in any particular year.
Each year, you can use up to $3,000 in capital losses to offset other types of income, including wages and salaries, tips, and interest. If you suffer more in capital losses, you get to carry over the unused amount into the future, but you have to wait until future years to claim them on your return. Most taxpayers end up getting to use all their losses eventually, but any unused losses go away upon the death of the taxpayer, potentially leaving heirs with an unusable tax break.
3. Gambling-Related Losses
When you win money from gambling, whether it's at a casino, in a lottery or in a more informal setting, the resulting income can technically be included in your taxable income. Many people therefore assume that if they lose money gambling, then they should be able to use that as a write-off.
For the most part, though, the tax law doesn't allow gambling losses except as a way to offset any winnings. Moreover, as we saw with casualty losses, any gambling loss you're eligible to take only qualifies as an itemized deduction. Therefore, if you usually take the standard deduction, you could end up in a situation in which you won't get any benefit from gambling losses even though you're technically eligible to claim them.
Losses are never fun, but in many cases, you can at least get a break on your taxes from them. In these cases, though, the IRS adds insult to injury by denying you the right to a tax benefit from your financial pain.
Motley Fool contributor Dan Caplinger tries to avoid losses entirely. You can follow him on Twitter @DanCaplinger or on Google Plus. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's one great stock to buy for 2015 and beyond.