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When Hurricane Newton came up, I immediately thought of friends and acquaintances that live and own property right along the track of the storm.  Luckily there may not have been loss of life, but there have been material losses. And of course, it is important to know that for federal income tax purposes, some losses may be claimed as a deduction on your federal return.

To be able to claim a deduction, you must have filed claims with any applicable insurance.  The amount of the loss is then reduced by insurance reimbursements you receive or expect to receive.  Annual loss deductions are also limited by one’s adjusted gross income and by any value left in the property (salvage value).  The annual loss allowance has a “floor” of 10% of AGI.  If your AGI was, say, $25,000, then the “AGI floor” is $2500. Only the loss portion exceeding that amount is deductible.  Also, one must subtract $100 from the computation for each loss event. The Internal Revenue Code requires both the “per event” $100 and the “annual” 10% “haircuts” from loss computations).

In the cases of thefts, the rule is similar.  You must be able to substantiate the loss (for example, with police reports) and its extent (a good starting point is documents supporting what the item cost you).

For U.S. persons, casualty and theft losses in Mexico are deductible in one’s federal return with the general outline above. IRS Form 4684 and its instructions have more details. For personal (nonbusiness) losses, the deduction is an itemized deduction on schedule A of the federal return.

For Mexico income tax, however, things are less exciting.  Generally speaking, Mexico Income tax law does not allow loss or theft deductions if the type property affected was not income producing (originally deductible, usually by being used in a trade or business).  In the past, Mexico has issued special decrees easing the rules somewhat with regards to due dates of tax payments and tax compliance, to benefit persons affected by large storms or disasters. As I read previous decrees, I feel they are just temporary measures that do not lead to any permanent tax benefit, unlike the U.S. rules.  As of today, no ruling has yet come out on Newton, although one may be forthcoming.

Bottom line:  A tax benefit may be available with regards to losses from casualties and thefts.  Begin collecting documentation as soon as the loss occurs!

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Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com.



 
 
A question I get quite often is, “Are Social Security benefits taxable”? “Do I have to file a federal return?”

It all depends, and it is important to note these are two separate questions with separate dollar thresholds for each.

SS Benefits may or may not be taxable, depending on what other sources of taxable income you have during the year. To figure it out, the IRS has published a dollar threshold (different for single, married filing joint and others).  If the number exceeds the threshold, the benefits must be included in a tax computation.

To figure if they are to be included or not, take ½ of the social security earnings for the year, and add to it any other taxable income earned during that year.  If married, one must add the spouse’s other income too. If the number is greater than $32,000, some of your benefits may be taxable (and includable in the next step…do I have to file?)

To figure if you need to file a return, there is another dollar threshold to examine.  It depends on your filing status and your age (and that of your spouse).  In the case of spouses, both over 65 years of age, married filing jointly, a return was required if the gross income was at least $23,100 (for 2016).  If in step 1 you determined that your SS benefits were not taxable, then they don’t count in figuring if you have a filing requirement.

This is more important that it may sound.  For expats, a federal filing requirement may generate other additional forms, such as Form 8938, “Statement of Specified Foreign Assets” that would otherwise not be required to be filed.

As the year progresses, it is wise to keep track of your income and begin checking to see if you will be required to file a federal income tax return.  Planning makes a difference! IRS Pub. 501 has all the details.