Casualty Loss Limitations, Deductions for Fines; Parent's Use of Child's Capital Gains

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, February 6, 2000.

Copyright 2000  Robert L. Sommers, all rights reserved.

Question: Several years ago, our home’s foundation started cracking. The damage cannot be repaired and we have no insurance. Can we claim the damage as a loss?

Answer: No. You are entitled to claim only a "casualty" loss arising from a sudden, unexpected or unusual cause, such as a hurricane, flood, earthquake, earthslide, fire, sonic booms or similar blasts and ocean waves, but not damage from gradual erosion or deterioration. Note: IRS claims that termite damage is not a casualty because it is not "sudden," although some courts have allowed the damage as a casualty.

A casualty loss is the difference between the property's fair market value immediately before and after the casualty, as determined by a professional appraisal. However, the loss amount is limited to the property's basis (generally the cost of the property, plus improvements).

Example: A home valued at $225,000 is flooded and immediately thereafter is worth only $100,000. If the home's basis was $150,000, $125,000 ($225,000 - $100,000) would be the total casualty loss -- well under the ceiling of the home's original basis of $150,000. If the home's basis was $75,000, then the loss would be capped at $75,000. In addition, each casualty loss is subject to a $100 deduction, therefore, the amount remaining after applying the $100 deductible is your casualty loss.

The loss is claimed as an itemized deduction on Schedule A of your Form 1040. Form 4684 is used to report casualty gains and losses of nonbusiness property. Note: Your deduction is limited to the loss in excess of 10% of your adjusted gross income.

Question: I drive a truck for a living. Can I deduct traffic tickets I receive while driving my truck and lawyer’s fees paid to fight these tickets?

Answer: No. You cannot deduct the payment of traffic tickets as a business expense. A fine or penalty paid for the violation of any law is not a deductible business expense, whether paid by you or your employer. There is a public policy against granting a tax deduction for payments made in violation of the law, because the tax system does not want to encourage unlawful behavior.

Attorney’s fees and cost costs incurred in the defense of an action in which the nondeductible fine or penalty may be imposed, however, may be deductible.

Even if it is to the taxpayer’s economic advantage to pay a penalty, rather than to comply with the law, the penalty cannot be converted into a deductible business expense.

For example, a roofing company may find it cheaper to pay parking tickets than to have their workers climb down from the roof to feed the parking meter. Although paying for parking would be a business expense, the parking ticket paid in lieu thereof is still a penalty and is not deductible. The same principle would apply to speeding tickets, double-parking and other violations which may be incurred voluntarily to speed up deliveries.

Question: If I have short-term gains in 1999 and my daughters, both under age 14, have short-term losses, may I use their losses to offset my gains?

Answer: No. You cannot include your daughters’ gains or losses as part of your income. Children under age 14 at the end of 1999 are taxed at their parents’ rates on their short-term or long-term capital gains and losses, but that does not mean that you combine your daughters’ income or loss with your own.

In general, parents may elect on Form 8814 to include on the parent’s tax return a child’s unearned income consisting of dividends and interest of less than $7,000, provided the child was under age 14. This election, however, is not available to gains or losses.

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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.