Today TaxMama hears from Elizabeth in the TaxQuips Forum, with a sad problem. “Can a loss on deposits be deducted on Schedule A or form 4684? I researched the IRS website and it is allowable. But what if the amount is more than $20,000 for the entire loss? Can you deduct $20,000 each year until the total loss of $100,000 is used? The bank was in India and has been proven to be uncollectible and worthless.”
How awful to lose your money, when you trust your bank.
In the information in IRS Publication 529, it explains about the $20,000 limit. That is not an annual limit. It is a one-time deduction that you can take on Schedule A. For some foolish reason, in addition to limiting the deduction, your benevolent legislators also reduced it by 2% of adjusted gross income.
If you have lost more than $20,000, Form 4684 may be your best option. Form 4684 is for casualty losses – when it comes to loss of money, that would include things like theft, embezzlement, larceny. However, there is a special provision to allow you to use Form 4684 for bank failures and bankruptcies. (see page 2 of the instructions.) Be sure to include information to prove the bank has closed.
If you CAN use Form 4684, there is not limit to the amount you can deduct. However, personal loss deductions are reduced by 10% of your adjusted gross income and $100. Business loss deductions are not reduced – in case this was a business account.
The good thing about treating this as a casualty loss is that if the loss is more than your taxable income, you can carry it back to previous years’ tax returns and get refunds. If you file it on Schedule A, not only are you limited to the $20,000 – but if your deductions wipe out your income, that’s it. Too bad. You get no further benefit.
So go dig up the proof about the bank failure and use Form 4684!
And remember, you can find answers to all kinds of questions about losing your deposits, and other tax issues, free. Where? Where else? At www.TaxMama.com.