In the unfortunate circumstance that you become a victim of identity theft, you may be entitled to tax deductions based on losses sustained from the attack.
While the April 15 tax deadline has been extended for many due to restrictions from the COVID-19 pandemic, it doesn’t mean people aren’t still scrambling to gather all of the required documents to complete those returns. July 15 will be here before we know it and experts have always said, the sooner you can file those taxes the fewer chances fraudsters can illegally try to file under your name. Speaking of security breaches, in the unfortunate circumstance that you become a victim of identity theft, you are entitled to tax deductions for identity theft losses sustained from the attack.
Here are some important things to keep in mind.
Understanding What to Deduct is Key
Since we are living in a very hack-heavy world, many companies will already cover or forgive breaches that occur. If a credit card company, for example, does not hold you responsible for fraudulent charges placed on your card or if your insurance reimburses you for losses, then this is not a tax-deductible item. Still, there are many that are left with huge financial losses after a breach. If these losses have been proven to be done with criminal intent they will qualify as tax-deductible.
File Appropriate Paperwork for Losses
If you do plan to deduct losses from theft you will be required to also submit proper documentation such as a police report for identity theft, a Casualties and Theft form and a 1040 Schedule A for itemized deductions due to the losses. The losses should be reported on your taxes under the deductions and credits area.
According to the IRS, those who have become a victim of a data breach should put protections in place for themselves by filling out and submitting Form 14039, Identity Theft Affidavit. This should be done if your Social Security number was compromised and if you’ve been told you may be a victim of tax-related identity theft.
Other Important Points
If you do qualify to deduct losses from identity theft, the amount will be adjusted based on fair market value according to the IRS. This is because the value immediately after the theft is considered to be zero. $100 is also subtracted from each casualty or theft event after any salvage value and any insurance or other reimbursement has also been deducted.
For casualty losses, you may deduct them in the year you sustained the loss. When it comes to theft losses, these can be deducted in the year you discover that property was stolen.
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