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File a free tax extension Publication 969 - Main Content Table of Contents Health Savings Accounts (HSAs)Qualifying for an HSA Contributions to an HSA Distributions From an HSA Balance in an HSA Death of HSA Holder Filing Form 8889 Employer Participation Medical Savings Accounts (MSAs)Archer MSAs Contributions to an MSA Distributions From an MSA Balance in an Archer MSA Death of the Archer MSA Holder Filing Form 8853 Employer Participation Medicare Advantage MSAs Flexible Spending Arrangements (FSAs)Qualifying for an FSA Contributions to an FSA Distributions From an FSA Balance in an FSA Employer Participation Health Reimbursement Arrangements (HRAs)Qualifying for an HRA Contributions to an HRA Distributions From an HRA Balance in an HRA Employer Participation How To Get Tax HelpLow Income Taxpayer Clinics Health Savings Accounts (HSAs) A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. File a free tax extension You must be an eligible individual to qualify for an HSA. File a free tax extension No permission or authorization from the IRS is necessary to establish an HSA. File a free tax extension You set up an HSA with a trustee. File a free tax extension A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. File a free tax extension The HSA can be established through a trustee that is different from your health plan provider. File a free tax extension Your employer may already have some information on HSA trustees in your area. File a free tax extension If you have an Archer MSA, you can generally roll it over into an HSA tax free. File a free tax extension See Rollovers, later. File a free tax extension What are the benefits of an HSA?   You may enjoy several benefits from having an HSA. File a free tax extension You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040. File a free tax extension Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. File a free tax extension The contributions remain in your account until you use them. File a free tax extension The interest or other earnings on the assets in the account are tax free. File a free tax extension Distributions may be tax free if you pay qualified medical expenses. File a free tax extension See Qualified medical expenses , later. File a free tax extension An HSA is “portable. File a free tax extension ” It stays with you if you change employers or leave the work force. File a free tax extension Qualifying for an HSA To be an eligible individual and qualify for an HSA, you must meet the following requirements. File a free tax extension You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month. File a free tax extension You have no other health coverage except what is permitted under Other health coverage , later. File a free tax extension You are not enrolled in Medicare. File a free tax extension You cannot be claimed as a dependent on someone else's 2013 tax return. File a free tax extension Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). File a free tax extension If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you. File a free tax extension If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. File a free tax extension This is true even if the other person does not actually claim your exemption. File a free tax extension Each spouse who is an eligible individual who wants an HSA must open a separate HSA. File a free tax extension You cannot have a joint HSA. File a free tax extension High deductible health plan (HDHP). File a free tax extension   An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. File a free tax extension Out-of-pocket expenses include copayments and other amounts, but do not include premiums. File a free tax extension   An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. File a free tax extension Preventive care includes, but is not limited to, the following. File a free tax extension Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals. File a free tax extension Routine prenatal and well-child care. File a free tax extension Child and adult immunizations. File a free tax extension Tobacco cessation programs. File a free tax extension Obesity weight-loss programs. File a free tax extension Screening services. File a free tax extension This includes screening services for the following: Cancer. File a free tax extension Heart and vascular diseases. File a free tax extension Infectious diseases. File a free tax extension Mental health conditions. File a free tax extension Substance abuse. File a free tax extension Metabolic, nutritional, and endocrine conditions. File a free tax extension Musculoskeletal disorders. File a free tax extension Obstetric and gynecological conditions. File a free tax extension Pediatric conditions. File a free tax extension Vision and hearing disorders. File a free tax extension For more information on screening services, see Notice 2004-23, 2004-15 I. File a free tax extension R. File a free tax extension B. File a free tax extension 725 available at www. File a free tax extension irs. File a free tax extension gov/irb/2004-15_IRB/ar10. File a free tax extension html. File a free tax extension     The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2013. File a free tax extension      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,250 $12,500 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. File a free tax extension Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. File a free tax extension    The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2014. File a free tax extension      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,350 $12,700 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. File a free tax extension Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. File a free tax extension   Self-only HDHP coverage is an HDHP covering only an eligible individual. File a free tax extension Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual). File a free tax extension Example. File a free tax extension An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual's employer. File a free tax extension This is family HDHP coverage. File a free tax extension Family plans that do not meet the high deductible rules. File a free tax extension   There are some family plans that have deductibles for both the family as a whole and for individual family members. File a free tax extension Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. File a free tax extension If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. File a free tax extension Example. File a free tax extension You have family health insurance coverage in 2013. File a free tax extension The annual deductible for the family plan is $3,500. File a free tax extension This plan also has an individual deductible of $1,500 for each family member. File a free tax extension The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($2,500) for family coverage. File a free tax extension Other health coverage. File a free tax extension   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. File a free tax extension However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. File a free tax extension    You can have additional insurance that provides benefits only for the following items. File a free tax extension Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property. File a free tax extension A specific disease or illness. File a free tax extension A fixed amount per day (or other period) of hospitalization. File a free tax extension   You can also have coverage (whether provided through insurance or otherwise) for the following items. File a free tax extension Accidents. File a free tax extension Disability. File a free tax extension Dental care. File a free tax extension Vision care. File a free tax extension Long-term care. File a free tax extension    Plans in which substantially all of the coverage is through the items listed earlier are not HDHPs. File a free tax extension For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA. File a free tax extension Prescription drug plans. File a free tax extension   You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. File a free tax extension If you can receive benefits before that deductible is met, you are not an eligible individual. File a free tax extension Other employee health plans. File a free tax extension   An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. File a free tax extension Health FSAs and HRAs are discussed later. File a free tax extension   However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements. File a free tax extension Limited-purpose health FSA or HRA. File a free tax extension These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. File a free tax extension Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible. File a free tax extension Suspended HRA. File a free tax extension Before the beginning of an HRA coverage period, you can elect to suspend the HRA. File a free tax extension The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. File a free tax extension When the suspension period ends, you are no longer eligible to make contributions to an HSA. File a free tax extension Post-deductible health FSA or HRA. File a free tax extension These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. File a free tax extension The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met. File a free tax extension Retirement HRA. File a free tax extension This arrangement pays or reimburses only those medical expenses incurred after retirement. File a free tax extension After retirement you are no longer eligible to make contributions to an HSA. File a free tax extension Health FSA – grace period. File a free tax extension   Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero. File a free tax extension See Flexible Spending Arrangements (FSAs) , later. File a free tax extension Contributions to an HSA Any eligible individual can contribute to an HSA. File a free tax extension For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. File a free tax extension For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. File a free tax extension Family members or any other person may also make contributions on behalf of an eligible individual. File a free tax extension Contributions to an HSA must be made in cash. File a free tax extension Contributions of stock or property are not allowed. File a free tax extension Limit on Contributions The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. File a free tax extension For 2013, if you have self-only HDHP coverage, you can contribute up to $3,250. File a free tax extension If you have family HDHP coverage, you can contribute up to $6,450. File a free tax extension For 2014, if you have self-only HDHP coverage, you can contribute up to $3,300. File a free tax extension If you have family HDHP coverage you can contribute up to $6,550. File a free tax extension If you were, or were considered (under the last-month rule, discussed later), an eligible individual for the entire year and did not change your type of coverage, you can contribute the full amount based on your type of coverage. File a free tax extension However, if you were not an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of: The limitation shown on the Line 3 Limitation Chart and Worksheetin the Instructions for Form 8889, Health Savings Accounts (HSAs), or The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year. File a free tax extension If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2013 is $6,450 even if you changed coverage during the year. File a free tax extension Last-month rule. File a free tax extension   Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. File a free tax extension You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month. File a free tax extension Testing period. File a free tax extension   If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. File a free tax extension For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. File a free tax extension For example, December 1, 2013, through December 31, 2014. File a free tax extension   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the total contributions made to your HSA that would not have been made except for the last-month rule. File a free tax extension You include this amount in your income in the year in which you fail to be an eligible individual. File a free tax extension This amount is also subject to a 10% additional tax. File a free tax extension The income and additional tax are shown on Form 8889, Part III. File a free tax extension Example 1. File a free tax extension Chris, age 53, becomes an eligible individual on December 1, 2013. File a free tax extension He has family HDHP coverage on that date. File a free tax extension Under the last-month rule, he contributes $6,450 to his HSA. File a free tax extension Chris fails to be an eligible individual in June 2014. File a free tax extension Because Chris did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), he must include in his 2014 income the contributions made in 2013 that would not have been made except for the last-month rule. File a free tax extension Chris uses the worksheet in the Form 8889 instructions to determine this amount. File a free tax extension January -0- February -0- March -0- April -0- May -0- June -0- July -0- August -0- September -0- October -0- November -0- December $6,450. File a free tax extension 00 Total for all months $6,450. File a free tax extension 00 Limitation. File a free tax extension Divide the total by 12 $537. File a free tax extension 50 Chris would include $5,912. File a free tax extension 50 ($6,450. File a free tax extension 00 – $537. File a free tax extension 50) in his gross income on his 2014 tax return. File a free tax extension Also, a 10% additional tax applies to this amount. File a free tax extension Example 2. File a free tax extension Erika, age 39, has self-only HDHP coverage on January 1, 2013. File a free tax extension Erika changes to family HDHP coverage on November 1, 2013. File a free tax extension Because Erika has family HDHP coverage on December 1, 2013, she contributes $6,450 for 2013. File a free tax extension Erika fails to be an eligible individual in March 2014. File a free tax extension Because she did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), she must include in income the contribution made that would not have been made except for the last-month rule. File a free tax extension Erika uses the worksheet in the Form 8889 instructions to determine this amount. File a free tax extension January $3,250. File a free tax extension 00 February $3,250. File a free tax extension 00 March $3,250. File a free tax extension 00 April $3,250. File a free tax extension 00 May $3,250. File a free tax extension 00 June $3,250. File a free tax extension 00 July $3,250. File a free tax extension 00 August $3,250. File a free tax extension 00 September $3,250. File a free tax extension 00 October $3,250. File a free tax extension 00 November $6,450. File a free tax extension 00 December $6,450. File a free tax extension 00 Total for all months $45,400. File a free tax extension 00 Limitation. File a free tax extension Divide the total by 12 $3,783. File a free tax extension 34 Erika would include $2,666. File a free tax extension 67 ($6,450 – $3,783. File a free tax extension 34) in her gross income on her 2014 tax return. File a free tax extension Also, a 10% additional tax applies to this amount. File a free tax extension Additional contribution. File a free tax extension   If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. File a free tax extension For example, if you have self-only coverage, you can contribute up to $4,250 (the contribution limit for self-only coverage ($3,250) plus the additional contribution of $1,000). File a free tax extension However, see Enrolled in Medicare , later. File a free tax extension If you have more than one HSA in 2013, your total contributions to all the HSAs cannot be more than the limits discussed earlier. File a free tax extension Reduction of contribution limit. File a free tax extension   You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year. File a free tax extension A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP. File a free tax extension Rules for married people. File a free tax extension   If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. File a free tax extension If each spouse has family coverage under a separate plan, the contribution limit for 2013 is $6,450. File a free tax extension You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouses' Archer MSAs. File a free tax extension After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division. File a free tax extension The rules for married people apply only if both spouses are eligible individuals. File a free tax extension If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. File a free tax extension If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,450. File a free tax extension Each spouse must make the additional contribution to his or her own HSA. File a free tax extension Example. File a free tax extension For 2013, Mr. File a free tax extension Auburn and his wife are both eligible individuals. File a free tax extension They each have family coverage under separate HDHPs. File a free tax extension Mr. File a free tax extension Auburn is 58 years old and Mrs. File a free tax extension Auburn is 53. File a free tax extension Mr. File a free tax extension and Mrs. File a free tax extension Auburn can split the family contribution limit ($6,450) equally or they can agree on a different division. File a free tax extension If they split it equally, Mr. File a free tax extension Auburn can contribute $4,225 to an HSA (one-half the maximum contribution for family coverage ($3,225) + $1,000 additional contribution) and Mrs. File a free tax extension Auburn can contribute $3,225 to an HSA. File a free tax extension Employer contributions. File a free tax extension   You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. File a free tax extension This includes amounts contributed to your account by your employer through a cafeteria plan. File a free tax extension Enrolled in Medicare. File a free tax extension   Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. File a free tax extension Example. File a free tax extension You turned age 65 in July 2013 and enrolled in Medicare. File a free tax extension You had an HDHP with self-only coverage and are eligible for an additional contribution of $1,000. File a free tax extension Your contribution limit is $2,125 ($4,250 × 6 ÷ 12). File a free tax extension Qualified HSA funding distribution. File a free tax extension   A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. File a free tax extension This distribution cannot be made from an ongoing SEP IRA or SIMPLE IRA. File a free tax extension For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. File a free tax extension   The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. File a free tax extension The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. File a free tax extension The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. File a free tax extension The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made. File a free tax extension   You can make only one qualified HSA funding distribution during your lifetime. File a free tax extension However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. File a free tax extension The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled. File a free tax extension Example. File a free tax extension In 2013, you are an eligible individual, age 57, with self-only HDHP coverage. File a free tax extension You can make a qualified HSA funding distribution of $4,250 ($3,250 plus $1,000 additional contribution). File a free tax extension Funding distribution – testing period. File a free tax extension   You must remain an eligible individual during the testing period. File a free tax extension For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. File a free tax extension For example, if a qualified HSA funding distribution is contributed to your HSA on August 10, 2013, your testing period begins in August 2013, and ends on August 31, 2014. File a free tax extension   If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA funding distribution. File a free tax extension You include this amount in income in the year in which you fail to be an eligible individual. File a free tax extension This amount is also subject to a 10% additional tax. File a free tax extension The income and the additional tax are shown on Form 8889, Part III. File a free tax extension   Each qualified HSA funding distribution allowed has its own testing period. File a free tax extension For example, you are an eligible individual, age 45, with self-only HDHP coverage. File a free tax extension On June 18, 2013, you make a qualified HSA funding distribution of $3,250. File a free tax extension On July 27, 2013, you enroll in family HDHP coverage and on August 17, 2013, you make a qualified HSA funding distribution of $3,200. File a free tax extension Your testing period for the first distribution begins in June 2013 and ends on June 30, 2014. File a free tax extension Your testing period for the second distribution begins in August 2013 and ends on August 31, 2014. File a free tax extension   The testing period rule that applies under the last-month rule (discussed earlier) does not apply to amounts contributed to an HSA through a qualified HSA funding distribution. File a free tax extension If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and will not be subject to the additional tax for failing to meet the last-month rule testing period. File a free tax extension Rollovers A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit. File a free tax extension Archer MSAs and other HSAs. File a free tax extension   You can roll over amounts from Archer MSAs and other HSAs into an HSA. File a free tax extension You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. File a free tax extension Rollover contributions do not need to be in cash. File a free tax extension Rollovers are not subject to the annual contribution limits. File a free tax extension   You must roll over the amount within 60 days after the date of receipt. File a free tax extension You can make only one rollover contribution to an HSA during a 1-year period. File a free tax extension Note. File a free tax extension If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer is not considered a rollover. File a free tax extension There is no limit on the number of these transfers. File a free tax extension Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889. File a free tax extension When To Contribute You can make contributions to your HSA for 2013 until April 15, 2014. File a free tax extension If you fail to be an eligible individual during 2013, you can still make contributions, up until April 15, 2014, for the months you were an eligible individual. File a free tax extension Your employer can make contributions to your HSA between January 1, 2014, and April 15, 2014, that are allocated to 2013. File a free tax extension Your employer must notify you and the trustee of your HSA that the contribution is for 2013. File a free tax extension The contribution will be reported on your 2014 Form W-2. File a free tax extension Reporting Contributions on Your Return Contributions made by your employer are not included in your income. File a free tax extension Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. File a free tax extension Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income. File a free tax extension Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. File a free tax extension The contributions are treated as a distribution of money and are not included in the partner's gross income. File a free tax extension Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. File a free tax extension In both situations, the partner can deduct the contribution made to the partner's HSA. File a free tax extension Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. File a free tax extension The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. File a free tax extension Form 8889. File a free tax extension   Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. File a free tax extension You should include all contributions made for 2013, including those made by April 15, 2014, that are designated for 2013. File a free tax extension Contributions made by your employer and qualified HSA funding distributions are also shown on the form. File a free tax extension   You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. File a free tax extension Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. File a free tax extension Follow the instructions for Form 8889. File a free tax extension Report your HSA deduction on Form 1040 or Form 1040NR. File a free tax extension Excess contributions. File a free tax extension   You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. File a free tax extension Excess contributions are not deductible. File a free tax extension Excess contributions made by your employer are included in your gross income. File a free tax extension If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. File a free tax extension   Generally, you must pay a 6% excise tax on excess contributions. File a free tax extension See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. File a free tax extension The excise tax applies to each tax year the excess contribution remains in the account. File a free tax extension   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. File a free tax extension You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. File a free tax extension You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. File a free tax extension If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income is not an excess contribution. File a free tax extension If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later. File a free tax extension Deducting an excess contribution in a later year. File a free tax extension   You may be able to deduct excess contributions for previous years that are still in your HSA. File a free tax extension The excess contribution you can deduct for the current year is the lesser of the following two amounts. File a free tax extension Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. File a free tax extension The total excess contributions in your HSA at the beginning of the year. File a free tax extension   Amounts contributed for the year include contributions by you, your employer, and any other person. File a free tax extension They also include any qualified HSA funding distribution made to your HSA. File a free tax extension Any excess contribution remaining at the end of a tax year is subject to the excise tax. File a free tax extension See Form 5329. File a free tax extension Distributions From an HSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. File a free tax extension When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA. File a free tax extension You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. File a free tax extension If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. File a free tax extension You do not have to make distributions from your HSA each year. File a free tax extension If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. File a free tax extension Generally, a distribution is money you get from your health savings account. File a free tax extension Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. File a free tax extension The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. File a free tax extension Qualified medical expenses. File a free tax extension   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. File a free tax extension These are explained in Publication 502, Medical and Dental Expenses. File a free tax extension   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for HSA purposes. File a free tax extension A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. File a free tax extension   For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. File a free tax extension State law determines when an HSA is established. File a free tax extension An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established. File a free tax extension   If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses. File a free tax extension   Qualified medical expenses are those incurred by the following persons. File a free tax extension You and your spouse. File a free tax extension All dependents you claim on your tax return. File a free tax extension Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. File a free tax extension    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. File a free tax extension You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA. File a free tax extension Insurance premiums. File a free tax extension   You cannot treat insurance premiums as qualified medical expenses unless the premiums are for: Long-term care insurance. File a free tax extension Health care continuation coverage (such as coverage under COBRA). File a free tax extension Health care coverage while receiving unemployment compensation under federal or state law. File a free tax extension Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap). File a free tax extension   The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. File a free tax extension See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040). File a free tax extension   Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. File a free tax extension For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses. File a free tax extension Health coverage tax credit. File a free tax extension   You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. File a free tax extension See Publication 502 for more information on this credit. File a free tax extension Deemed distributions from HSAs. File a free tax extension   The following situations result in deemed taxable distributions from your HSA. File a free tax extension You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2013. File a free tax extension Your account ceases to be an HSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8889. File a free tax extension You used any portion of any of your HSAs as security for a loan at any time in 2013. File a free tax extension You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. File a free tax extension   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the HSA, Lending of money between you and the HSA, Furnishing goods, services, or facilities between you and the HSA, and Transfer to or use by you, or for your benefit, of any assets of the HSA. File a free tax extension   Any deemed distribution will not be treated as used to pay qualified medical expenses. File a free tax extension These distributions are included in your income and are subject to the additional 20% tax, discussed later. File a free tax extension Recordkeeping. File a free tax extension You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. File a free tax extension Do not send these records with your tax return. File a free tax extension Keep them with your tax records. File a free tax extension Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). File a free tax extension If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. File a free tax extension However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. File a free tax extension Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. File a free tax extension If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. File a free tax extension Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. File a free tax extension You may have to pay an additional 20% tax on your taxable distribution. File a free tax extension HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA. File a free tax extension Additional tax. File a free tax extension   There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. File a free tax extension Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. File a free tax extension Exceptions. File a free tax extension   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. File a free tax extension Balance in an HSA An HSA is generally exempt from tax. File a free tax extension You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. File a free tax extension Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). File a free tax extension Earnings on amounts in an HSA are not included in your income while held in the HSA. File a free tax extension Death of HSA Holder You should choose a beneficiary when you set up your HSA. File a free tax extension What happens to that HSA when you die depends on whom you designate as the beneficiary. File a free tax extension Spouse is the designated beneficiary. File a free tax extension   If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death. File a free tax extension Spouse is not the designated beneficiary. File a free tax extension   If your spouse is not the designated beneficiary of your HSA: The account stops being an HSA, and The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. File a free tax extension If your estate is the beneficiary, the value is included on your final income tax return. File a free tax extension The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. File a free tax extension Filing Form 8889 You must file Form 8889 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. File a free tax extension You must file the form even if only your employer or your spouse's employer made contributions to the HSA. File a free tax extension If, during the tax year, you are the beneficiary of two or more HSAs or you are a beneficiary of an HSA and you have your own HSA, you must complete a separate Form 8889 for each HSA. File a free tax extension Enter “statement” at the top of each Form 8889 and complete the form as instructed. File a free tax extension Next, complete a controlling Form 8889 combining the amounts shown on each of the statement Forms 8889. File a free tax extension Attach the statements to your tax return after the controlling Form 8889. File a free tax extension Employer Participation This section contains the rules that employers must follow if they decide to make HSAs available to their employees. File a free tax extension Unlike the previous discussions, “you” refers to the employer and not to the employee. File a free tax extension Health plan. File a free tax extension   If you want your employees to be able to have an HSA, they must have an HDHP. File a free tax extension You can provide no additional coverage other than those exceptions listed previously under Other health coverage . File a free tax extension Contributions. File a free tax extension   You can make contributions to your employees' HSAs. File a free tax extension You deduct the contributions on your business income tax return for the year in which you make the contributions. File a free tax extension If the contribution is allocated to the prior year, you still deduct it in the year in which you made the contribution. File a free tax extension   For more information on employer contributions, see Notice 2008-59, 2008-29 I. File a free tax extension R. File a free tax extension B. File a free tax extension 123, questions 23 through 27, available at www. File a free tax extension irs. File a free tax extension gov/irb/2008-29_IRB/ar11. File a free tax extension html. File a free tax extension Comparable contributions. File a free tax extension   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. File a free tax extension Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. File a free tax extension The comparability rules do not apply to contributions made through a cafeteria plan. File a free tax extension Comparable participating employees. File a free tax extension   Comparable participating employees: Are covered by your HDHP and are eligible to establish an HSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (part-time, full-time, or former employees). File a free tax extension   To meet the comparability requirements for eligible employees who have not established an HSA by December 31 or have not notified you that they have an HSA, you must meet a notice requirement and a contribution requirement. File a free tax extension   You will meet the notice requirement if by January 15 of the following calendar year you provide a written notice to all such employees. File a free tax extension The notice must state that each eligible employee who, by the last day of February, establishes an HSA and notifies you that they have established an HSA will receive a comparable contribution to the HSA for the prior year. File a free tax extension For a sample of the notice, see Regulation 54. File a free tax extension 4980G-4 A-14(c). File a free tax extension You will meet the contribution requirement for these employees if by April 15, 2014, you contribute comparable amounts plus reasonable interest to the employee's HSA for the prior year. File a free tax extension Note. File a free tax extension For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees. File a free tax extension Excise tax. File a free tax extension   If you made contributions to your employees' HSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. File a free tax extension Employment taxes. File a free tax extension   Amounts you contribute to your employees' HSAs are generally not subject to employment taxes. File a free tax extension You must report the contributions in box 12 of the Form W-2 you file for each employee. File a free tax extension This includes the amounts the employee elected to contribute through a cafeteria plan. File a free tax extension Enter code “W” in box 12. File a free tax extension Medical Savings Accounts (MSAs) Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder's spouse, or the account holder's dependent(s). File a free tax extension After December 31, 2007, you cannot be treated as an eligible individual for Archer MSA purposes unless: You were an active participant for any tax year ending before January 1, 2008, or You became an active participant for a tax year ending after December 31, 2007, by reason of coverage under a high deductible health plan (HDHP) of an Archer MSA participating employer. File a free tax extension A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is eligible for Medicare. File a free tax extension Archer MSAs An Archer MSA is a tax-exempt trust or custodial account that you set up with a U. File a free tax extension S. File a free tax extension financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. File a free tax extension What are the benefits of an Archer MSA?   You may enjoy several benefits from having an Archer MSA. File a free tax extension You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040 or Form 1040NR. File a free tax extension The interest or other earnings on the assets in your Archer MSA are tax free. File a free tax extension Distributions may be tax free if you pay qualified medical expenses. File a free tax extension See Qualified medical expenses , later. File a free tax extension The contributions remain in your Archer MSA from year to year until you use them. File a free tax extension An Archer MSA is “portable” so it stays with you if you change employers or leave the work force. File a free tax extension Qualifying for an Archer MSA To qualify for an Archer MSA, you must be either of the following. File a free tax extension An employee (or the spouse of an employee) of a small employer (defined later) that maintains a self-only or family HDHP for you (or your spouse). File a free tax extension A self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP. File a free tax extension You can have no other health or Medicare coverage except what is permitted under Other health coverage , later. File a free tax extension You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month. File a free tax extension If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an Archer MSA contribution. File a free tax extension This is true even if the other person does not actually claim your exemption. File a free tax extension Small employer. File a free tax extension   A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years. File a free tax extension The definition of small employer is modified for new employers and growing employers. File a free tax extension Growing employer. File a free tax extension   A small employer may begin HDHPs and Archer MSAs for his or her employees and then grow beyond 50 employees. File a free tax extension The employer will continue to meet the requirement for small employers if he or she: Had 50 or fewer employees when the Archer MSAs began, Made a contribution that was excludable or deductible as an Archer MSA for the last year he or she had 50 or fewer employees, and Had an average of 200 or fewer employees each year after 1996. File a free tax extension Changing employers. File a free tax extension   If you change employers, your Archer MSA moves with you. File a free tax extension However, you may not make additional contributions unless you are otherwise eligible. File a free tax extension High deductible health plan (HDHP). File a free tax extension   To be eligible for an Archer MSA, you must be covered under an HDHP. File a free tax extension An HDHP has: A higher annual deductible than typical health plans, and A maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses. File a free tax extension Limits. File a free tax extension   The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for HDHPs for 2013. File a free tax extension   Self-only coverage Family coverage Minimum annual deductible $2,150 $4,300 Maximum annual deductible $3,200 $6,450 Maximum annual out-of-pocket expenses $4,300 $7,850 Family plans that do not meet the high deductible rules. File a free tax extension   There are some family plans that have deductibles for both the family as a whole and for individual family members. File a free tax extension Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. File a free tax extension If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. File a free tax extension Example. File a free tax extension You have family health insurance coverage in 2013. File a free tax extension The annual deductible for the family plan is $5,500. File a free tax extension This plan also has an individual deductible of $2,000 for each family member. File a free tax extension The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($4,300) for family coverage. File a free tax extension Other health coverage. File a free tax extension   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. File a free tax extension However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. File a free tax extension However, you can have additional insurance that provides benefits only for the following items. File a free tax extension Liabilities incurred under workers' compensation laws, torts, or ownership or use of property. File a free tax extension A specific disease or illness. File a free tax extension A fixed amount per day (or other period) of hospitalization. File a free tax extension You can also have coverage (whether provided through insurance or otherwise) for the following items. File a free tax extension Accidents. File a free tax extension Disability. File a free tax extension Dental care. File a free tax extension Vision care. File a free tax extension Long-term care. File a free tax extension Contributions to an MSA Contributions to an Archer MSA must be made in cash. File a free tax extension You cannot contribute stock or other property to an Archer MSA. File a free tax extension Who can contribute to my Archer MSA?   If you are an employee, your employer may make contributions to your Archer MSA. File a free tax extension (You do not pay tax on these contributions. File a free tax extension ) If your employer does not make contributions to your Archer MSA, or you are self-employed, you can make your own contributions to your Archer MSA. File a free tax extension Both you and your employer cannot make contributions to your Archer MSA in the same year. File a free tax extension You do not have to make contributions to your Archer MSA every year. File a free tax extension    If your spouse is covered by your HDHP and an excludable amount is contributed by your spouse's employer to an Archer MSA belonging to your spouse, you cannot make contributions to your own Archer MSA that year. File a free tax extension Limits There are two limits on the amount you or your employer can contribute to your Archer MSA: The annual deductible limit. File a free tax extension An income limit. File a free tax extension Annual deductible limit. File a free tax extension   You (or your employer) can contribute up to 75% of the annual deductible of your HDHP (65% if you have a self-only plan) to your Archer MSA. File a free tax extension You must have the HDHP all year to contribute the full amount. File a free tax extension If you do not qualify to contribute the full amount for the year, determine your annual deductible limit by using the worksheet in the Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File a free tax extension Example 1. File a free tax extension You have an HDHP for your family all year in 2013. File a free tax extension The annual deductible is $5,000. File a free tax extension You can contribute up to $3,750 ($5,000 × 75%) to your Archer MSA for the year. File a free tax extension Example 2. File a free tax extension You have an HDHP for your family for the entire months of July through December 2013 (6 months). File a free tax extension The annual deductible is $5,000. File a free tax extension You can contribute up to $1,875 ($5,000 × 75% ÷ 12 × 6) to your Archer MSA for the year. File a free tax extension If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. File a free tax extension The contribution limit is split equally between you unless you agree on a different division. File a free tax extension Income limit. File a free tax extension   You cannot contribute more than you earned for the year from the employer through whom you have your HDHP. File a free tax extension   If you are self-employed, you cannot contribute more than your net self-employment income. File a free tax extension This is your income from self-employment minus expenses (including the deductible part of self-employment tax). File a free tax extension Example 1. File a free tax extension Noah Paul earned $25,000 from ABC Company in 2013. File a free tax extension Through ABC, he had an HDHP for his family for the entire year. File a free tax extension The annual deductible was $5,000. File a free tax extension He can contribute up to $3,750 to his Archer MSA (75% × $5,000). File a free tax extension He can contribute the full amount because he earned more than $3,750 at ABC. File a free tax extension Example 2. File a free tax extension Westley Lawrence is self-employed. File a free tax extension He had an HDHP for his family for the entire year in 2013. File a free tax extension The annual deductible was $5,000. File a free tax extension Based on the annual deductible, the maximum contribution to his Archer MSA would have been $3,750 (75% × $5,000). File a free tax extension However, after deducting his business expenses, Joe's net self-employment income is $2,500 for the year. File a free tax extension Therefore, he is limited to a contribution of $2,500. File a free tax extension Individuals enrolled in Medicare. File a free tax extension   Beginning with the first month you are enrolled in Medicare, you cannot contribute to an Archer MSA. File a free tax extension However, you may be eligible for a Medicare Advantage MSA, discussed later. File a free tax extension When To Contribute You can make contributions to your Archer MSA for 2013 until April 15, 2014. File a free tax extension Reporting Contributions on Your Return Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR. File a free tax extension You should include all contributions you, or your employer, made for 2013, including those made by April 15, 2014, that are designated for 2013. File a free tax extension You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount you (or your employer) contributed during the year. File a free tax extension Your employer's contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R. File a free tax extension Follow the instructions for Form 8853 and complete the worksheet in the instructions. File a free tax extension Report your Archer MSA deduction on Form 1040 or Form 1040NR. File a free tax extension Excess contributions. File a free tax extension   You will have excess contributions if the contributions to your Archer MSA for the year are greater than the limits discussed earlier. File a free tax extension Excess contributions are not deductible. File a free tax extension Excess contributions made by your employer are included in your gross income. File a free tax extension If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. File a free tax extension   Generally, you must pay a 6% excise tax on excess contributions. File a free tax extension See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. File a free tax extension The excise tax applies to each tax year the excess contribution remains in the account. File a free tax extension   You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions. File a free tax extension You withdraw the excess contributions by the due date, including extensions, of your tax return. File a free tax extension You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings. File a free tax extension Deducting an excess contribution in a later year. File a free tax extension   You may be able to deduct excess contributions for previous years that are still in your Archer MSA. File a free tax extension The excess contribution you can deduct in the current year is the lesser of the following two amounts. File a free tax extension Your maximum Archer MSA contribution limit for the year minus any amounts contributed to your Archer MSA for the year. File a free tax extension The total excess contributions in your Archer MSA at the beginning of the year. File a free tax extension   Any excess contributions remaining at the end of a tax year are subject to the excise tax. File a free tax extension See Form 5329. File a free tax extension Distributions From an MSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. File a free tax extension When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your Archer MSA to send you a distribution from your Archer MSA. File a free tax extension You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). File a free tax extension If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an additional 20% tax as well. File a free tax extension You do not have to make withdrawals from your Archer MSA each year. File a free tax extension If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. File a free tax extension A distribution is money you get from your Archer MSA. File a free tax extension The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. File a free tax extension Qualified medical expenses. File a free tax extension   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. File a free tax extension These are explained in Publication 502. File a free tax extension   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for MSA purposes. File a free tax extension A medicine or drug will be a qualified medical expense for MSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. File a free tax extension   Qualified medical expenses are those incurred by the following persons. File a free tax extension You and your spouse. File a free tax extension All dependents you claim on your tax return. File a free tax extension Any person you could have claimed as a dependent on your return except that: The person filed a joint return, The person had gross income of $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. File a free tax extension    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. File a free tax extension    You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your Archer MSA. File a free tax extension Special rules for insurance premiums. File a free tax extension   Generally, you cannot treat insurance premiums as qualified medical expenses for Archer MSAs. File a free tax extension You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for Archer MSAs. File a free tax extension Health coverage tax credit. File a free tax extension   You cannot claim this credit for premiums that you pay with a tax-free distribution from your Archer MSA. File a free tax extension See Publication 502 for information on this credit. File a free tax extension Deemed distributions from Archer MSAs. File a free tax extension   The following situations result in deemed taxable distributions from your Archer MSA. File a free tax extension You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs at any time in 2013. File a free tax extension Your account ceases to be an Archer MSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8853. File a free tax extension You used any portion of any of your Archer MSAs as security for a loan at any time in 2013. File a free tax extension You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. File a free tax extension   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the Archer MSA, Lending of money between you and the Archer MSA, Furnishing goods, services, or facilities between you and the Archer MSA, and Transfer to or use by you, or for your benefit, of any assets of the Archer MSA. File a free tax extension   Any deemed distribution will not be treated as used to pay qualified medical expenses. File a free tax extension These distributions are included in your income and are subject to the additional 20% tax, discussed later. File a free tax extension Recordkeeping. File a free tax extension You must keep records sufficient to show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. File a free tax extension Do not send these records with your tax return. File a free tax extension Keep them with your tax records. File a free tax extension Reporting Distributions on Your Return How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier). File a free tax extension If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. File a free tax extension Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. File a free tax extension If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. File a free tax extension Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR. File a free tax extension You may have to pay an additional 20% tax, discussed later, on your taxable distribution. File a free tax extension If an amount (other than a rollover) is contributed to your Archer MSA this year (by you or your employer), you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who is not covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred. File a free tax extension Rollovers. File a free tax extension   Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA is not taxable if you complete the rollover within 60 days. File a free tax extension An Archer MSA and an HSA can only receive one rollover contribution during a 1-year period. File a free tax extension See the Form 8853 instructions for more information. File a free tax extension Additional tax. File a free tax extension   There is a 20% additional tax on the part of your distributions not used for qualified medical expenses. File a free tax extension Figure the tax on Form 8853 and file it with your Form 1040 or Form 1040NR. File a free tax extension Report the additional tax in the total on Form 1040 or Form 1040NR. File a free tax extension Exceptions. File a free tax extension   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. File a free tax extension Balance in an Archer MSA An Archer MSA is generally exempt from tax. File a free tax extension You are permitted to take a distribution from your Archer MSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. File a free tax extension Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). File a free tax extension Earnings on amounts in an Archer MSA are not included in your income while held in the Archer MSA. File a free tax extension Death of the Archer MSA Holder You should choose a beneficiary when you set up your Archer MSA. File a free tax extension What happens to that Archer MSA when you die depends on whom you designate as the beneficiary. File a free tax extension Spouse is the designated beneficiary. File a free tax extension   If your spouse is the designated beneficiary of your Archer MSA, it will be treated as your spouse's Archer MSA after your death. File a free tax extension Spouse is not the designated beneficiary. File a free tax extension   If your spouse is not the designated beneficiary of your Archer MSA: The account stops being an Archer MSA, and The fair market value of the Archer MSA becomes taxable to the beneficiary in the year in which you die. File a free tax extension   If your estate is the beneficiary, the fair market value of the Archer MSA will be included on your final income tax return. File a free tax extension The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death. File a free tax extension Filing Form 8853 You must file Form 8853 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your Archer MSA during the year. File a free tax extension You must file the form even if only your employer or your spouse's employer made contributions to the Archer MSA. File a free tax extension If, during the tax year, you are the beneficiary of two or more Archer MSAs or you are a beneficiary of an Archer MSA and you have your own Archer MSA, you must complete a separate Form 8853 for each MSA. File a free tax extension Enter “statement” at the top of each Form 8853 and complete the form as instructed. File a free tax extension Next, complete a controlling Form 8853 combining the amounts shown on each of the statement Forms 8853. File a free tax extension Attach the statements to your tax return after the controlling Form 8853. File a free tax extension Employer Participation This section contains the rules that employers must follow if they decide to make Archer MSAs available to their employees. File a free tax extension Unlike the previous discussions, “you” refers to the employer and not to the employee. File a free tax extension Health plan. File a free tax extension   If you want your employees to be able to have an Archer MSA, you must make an HDHP available to them. File a free tax extension You can provide no additional coverage other than those exceptions listed previously under Other health coverage . File a free tax extension Contributions. File a free tax extension   You can make contributions to your employees' Archer MSAs. File a free tax extension You deduct the contributions on the “Employee benefit programs” line of your business income tax return for the year in which you make the contributions. File a free tax extension If you are filing Form 1040, Schedule C, this is Part II, line 14. File a free tax extension Comparable contributions. File a free tax extension   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' Archer MSAs. File a free tax extension Your contributions are comparable if they are either: The same amount, or The same percentage of the annual deductible limit under the HDHP covering the employees. File a free tax extension Comparable participating employees. File a free tax extension   Comparable participating employees: Are covered by your HDHP and are eligible to establish an Archer MSA, Have the same category of coverage (either self-only or family coverage), and Have the same category of employment (either part-time or full-time). File a free tax extension Excise tax. File a free tax extension   If you made contributions to your employees' Archer MSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. File a free tax extension Employment taxes. File a free tax extension   Amounts you contribute to your employees' Archer MSAs are generally not subject to employment taxes. File a free tax extension You must report the contributions in box 12 of the Form W-2 you file for each employee. File a free tax extension Enter code “R” in box 12. File a free tax extension Medicare Advantage MSAs A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. File a free tax extension To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and have a high deductible health plan (HDHP) that meets the Medicare guidelines. File a free tax extension A Medicare Advantage MSA is a tax-exempt trust or custodial savings account that you set up with a financial institution (such as a bank or an insurance company) in which the Medicare program can deposit money for qualified medical expenses. File a free tax extension The money in your account is not taxed if it is used for qualified medical expenses, and it may earn interest or dividends. File a free tax extension An HDHP is a special health insurance policy that has a high deductible. File a free tax extension You choose the policy you want to use as part of your Medicare Advantage MSA plan. File a free tax extension However, the policy must be approved by the Medicare program. File a free tax extension Medicare Advantage MSAs are administered through the federal Medicare program. File a free tax extension You can get information by calling 1-800-Medicare (1-800-633-4227) or through the Internet at www. File a free tax extension medicare. File a free tax extension gov. File a free tax extension Note. File a free tax extension You must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your tax return if you have a Medicare Advantage MSA. File a free tax extension Flexible Spending Arrangements (FSAs) A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. File a free tax extension FSAs are usually funded through voluntary salary reduction agreements with your employer. File a free tax extension No employment or federal income taxes are deducted from your contribution. File a free tax extension The employer may also contribute. File a free tax extension Note. File a free tax extension Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for FSAs on your income tax return. File a free tax extension For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier. File a free tax extension What are the benefits of an FSA?   You may enjoy several benefits from having an FSA. File a free tax extension Contributions made by your employer can be excluded from your gross income. File a free tax extension No employment or federal income taxes are deducted from the contributions. File a free tax extension Withdrawals may be tax free if you pay qualified medical expenses. File a free tax extension See Qualified medical expenses , later. File a free tax extension You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account. File a free tax extension Qualifying for an FSA Health FSAs are employer-established benefit plans. File a free tax extension These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. File a free tax extension Employers have complete flexibility to offer various combinations of benefits in designing their plan. File a free tax extension You do not have to be covered under any other health care plan to participate. File a free tax extension Self-employed persons are not eligible for an FSA. File a free tax extension Certain limitations may apply if you are a highly compensated participant or a key employee. File a free tax extension Contributions to an FSA You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. File a free tax extension This is sometimes called a salary reduction agreement. File a free tax extension The employer may also contribute to your FSA if specified in the plan. File a free tax extension You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. File a free tax extension However, contributions made by your employer to provide coverage for long-term care insurance must be included in income. File a free tax extension When To Contribute At the
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File a free tax extension Publication 547 - Main Content Table of Contents CasualtyFamily pet. File a free tax extension Progressive deterioration. File a free tax extension Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. File a free tax extension Business or income-producing property. File a free tax extension Loss of inventory. File a free tax extension Leased property. File a free tax extension Exception for personal-use real property. File a free tax extension Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. File a free tax extension Lessee's loss. File a free tax extension Disaster Area LossesDisaster loss to inventory. File a free tax extension Main home in disaster area. File a free tax extension Unsafe home. File a free tax extension Time limit for making choice. File a free tax extension Revoking your choice. File a free tax extension Figuring the loss deduction. File a free tax extension How to report the loss on Form 1040X. File a free tax extension Records. File a free tax extension Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. File a free tax extension Property held more than 1 year. File a free tax extension Depreciable property. File a free tax extension Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. File a free tax extension A sudden event is one that is swift, not gradual or progressive. File a free tax extension An unexpected event is one that is ordinarily unanticipated and unintended. File a free tax extension An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. File a free tax extension Generally, casualty losses are deductible during the taxable year that the loss occurred. File a free tax extension See Table 3, later. File a free tax extension Deductible losses. File a free tax extension   Deductible casualty losses can result from a number of different causes, including the following. File a free tax extension Car accidents (but see Nondeductible losses , next, for exceptions). File a free tax extension Earthquakes. File a free tax extension Fires (but see Nondeductible losses , next, for exceptions). File a free tax extension Floods. File a free tax extension Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. File a free tax extension Mine cave-ins. File a free tax extension Shipwrecks. File a free tax extension Sonic booms. File a free tax extension Storms, including hurricanes and tornadoes. File a free tax extension Terrorist attacks. File a free tax extension Vandalism. File a free tax extension Volcanic eruptions. File a free tax extension Nondeductible losses. File a free tax extension   A casualty loss is not deductible if the damage or destruction is caused by the following. File a free tax extension Accidentally breaking articles such as glassware or china under normal conditions. File a free tax extension A family pet (explained below). File a free tax extension A fire if you willfully set it, or pay someone else to set it. File a free tax extension A car accident if your willful negligence or willful act caused it. File a free tax extension The same is true if the willful act or willful negligence of someone acting for you caused the accident. File a free tax extension Progressive deterioration (explained below). File a free tax extension However, see Special Procedure for Damage From Corrosive Drywall , later. File a free tax extension Family pet. File a free tax extension   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. File a free tax extension Example. File a free tax extension Your antique oriental rug was damaged by your new puppy before it was housebroken. File a free tax extension Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. File a free tax extension Progressive deterioration. File a free tax extension   Loss of property due to progressive deterioration is not deductible as a casualty loss. File a free tax extension This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. File a free tax extension The following are examples of damage due to progressive deterioration. File a free tax extension The steady weakening of a building due to normal wind and weather conditions. File a free tax extension The deterioration and damage to a water heater that bursts. File a free tax extension However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. File a free tax extension Most losses of property caused by droughts. File a free tax extension To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. File a free tax extension Termite or moth damage. File a free tax extension The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. File a free tax extension However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. File a free tax extension Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. File a free tax extension Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. File a free tax extension For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. File a free tax extension Note. File a free tax extension If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. File a free tax extension S. File a free tax extension Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. File a free tax extension Form 4684 for the appropriate year can be found at IRS. File a free tax extension gov. File a free tax extension Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. File a free tax extension Corrosive drywall. File a free tax extension   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. File a free tax extension The revised identification guidance and remediation guidelines are available at www. File a free tax extension cpsc. File a free tax extension gov/Safety-Education/Safety-Education-Centers/Drywall. File a free tax extension Special instructions for completing Form 4684. File a free tax extension   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. File a free tax extension The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. File a free tax extension Top margin of Form 4684. File a free tax extension   Enter “Revenue Procedure 2010-36”. File a free tax extension Line 1. File a free tax extension   Enter the information required by the line 1 instructions. File a free tax extension Line 2. File a free tax extension   Skip this line. File a free tax extension Line 3. File a free tax extension   Enter the amount of insurance or other reimbursements you received (including through litigation). File a free tax extension If none, enter -0-. File a free tax extension Lines 4–7. File a free tax extension   Skip these lines. File a free tax extension Line 8. File a free tax extension   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. File a free tax extension Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. File a free tax extension Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. File a free tax extension If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). File a free tax extension Line 9. File a free tax extension   If line 8 is more than line 3, do one of the following. File a free tax extension If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. File a free tax extension If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. File a free tax extension If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. File a free tax extension    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. File a free tax extension See Reimbursement Received After Deducting Loss, later. File a free tax extension Lines 10–18. File a free tax extension   Complete these lines according to the Instructions for Form 4684. File a free tax extension Choosing not to follow this special procedure. File a free tax extension   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. File a free tax extension This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . File a free tax extension Furthermore, you must have proof that shows the following. File a free tax extension The loss is properly deductible in the tax year you claimed it and not in some other year. File a free tax extension See When To Report Gains and Losses , later. File a free tax extension The amount of the claimed loss. File a free tax extension See Proof of Loss , later. File a free tax extension No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. File a free tax extension See When To Report Gains and Losses , later. File a free tax extension Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. File a free tax extension The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. File a free tax extension You do not need to show a conviction for theft. File a free tax extension Theft includes the taking of money or property by the following means. File a free tax extension Blackmail. File a free tax extension Burglary. File a free tax extension Embezzlement. File a free tax extension Extortion. File a free tax extension Kidnapping for ransom. File a free tax extension Larceny. File a free tax extension Robbery. File a free tax extension The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. File a free tax extension Decline in market value of stock. File a free tax extension   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. File a free tax extension However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. File a free tax extension You report a capital loss on Schedule D (Form 1040). File a free tax extension For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. File a free tax extension Mislaid or lost property. File a free tax extension    The simple disappearance of money or property is not a theft. File a free tax extension However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. File a free tax extension Sudden, unexpected, and unusual events were defined earlier under Casualty . File a free tax extension Example. File a free tax extension A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. File a free tax extension The diamond falls from the ring and is never found. File a free tax extension The loss of the diamond is a casualty. File a free tax extension Losses from Ponzi-type investment schemes. File a free tax extension   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. File a free tax extension R. File a free tax extension B. File a free tax extension 735 (available at www. File a free tax extension irs. File a free tax extension gov/irb/2009-14_IRB/ar07. File a free tax extension html). File a free tax extension Revenue Procedure 2009-20, 2009-14 I. File a free tax extension R. File a free tax extension B. File a free tax extension 749 (available at www. File a free tax extension irs. File a free tax extension gov/irb/2009-14_IRB/ar11. File a free tax extension html). File a free tax extension Revenue Procedure 2011-58, 2011-50 I. File a free tax extension R. File a free tax extension B. File a free tax extension 847 (available at www. File a free tax extension irs. File a free tax extension gov/irb/2011-50_IRB/ar11. File a free tax extension html). File a free tax extension If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. File a free tax extension Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. File a free tax extension Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. File a free tax extension You do not need to complete Appendix A. File a free tax extension For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. File a free tax extension   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. File a free tax extension Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. File a free tax extension If you incurred this type of loss, you can choose one of the following ways to deduct the loss. File a free tax extension As a casualty loss. File a free tax extension As an ordinary loss. File a free tax extension As a nonbusiness bad debt. File a free tax extension Casualty loss or ordinary loss. File a free tax extension   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. File a free tax extension The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. File a free tax extension If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. File a free tax extension However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. File a free tax extension Once you make the choice, you cannot change it without permission from the Internal Revenue Service. File a free tax extension   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. File a free tax extension The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. File a free tax extension Your loss is subject to the 2%-of-adjusted-gross-income limit. File a free tax extension You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. File a free tax extension Nonbusiness bad debt. File a free tax extension   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. File a free tax extension How to report. File a free tax extension   The kind of deduction you choose for your loss on deposits determines how you report your loss. File a free tax extension See Table 1. File a free tax extension More information. File a free tax extension   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. File a free tax extension Deducted loss recovered. File a free tax extension   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. File a free tax extension If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. File a free tax extension For more information, see Recoveries in Publication 525. File a free tax extension Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. File a free tax extension You also must be able to support the amount you take as a deduction. File a free tax extension Casualty loss proof. File a free tax extension   For a casualty loss, you should be able to show all of the following. File a free tax extension The type of casualty (car accident, fire, storm, etc. File a free tax extension ) and when it occurred. File a free tax extension That the loss was a direct result of the casualty. File a free tax extension That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. File a free tax extension Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. File a free tax extension Theft loss proof. File a free tax extension   For a theft loss, you should be able to show all of the following. File a free tax extension When you discovered that your property was missing. File a free tax extension That your property was stolen. File a free tax extension That you were the owner of the property. File a free tax extension Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. File a free tax extension    It is important that you have records that will prove your deduction. File a free tax extension If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. File a free tax extension Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. File a free tax extension Table 1. File a free tax extension Reporting Loss on Deposits IF you choose to report the loss as a(n). File a free tax extension . File a free tax extension . File a free tax extension   THEN report it on. File a free tax extension . File a free tax extension . File a free tax extension casualty loss   Form 4684 and Schedule A  (Form 1040). File a free tax extension ordinary loss   Schedule A (Form 1040). File a free tax extension nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). File a free tax extension Amount of loss. File a free tax extension   Figure the amount of your loss using the following steps. File a free tax extension Determine your adjusted basis in the property before the casualty or theft. File a free tax extension Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. File a free tax extension From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. File a free tax extension For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. File a free tax extension Gain from reimbursement. File a free tax extension   If your reimbursement is more than your adjusted basis in the property, you have a gain. File a free tax extension This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. File a free tax extension If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. File a free tax extension See Figuring a Gain , later. File a free tax extension Business or income-producing property. File a free tax extension   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. File a free tax extension Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. File a free tax extension   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. File a free tax extension   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. File a free tax extension Do not claim this loss again as a casualty or theft loss. File a free tax extension If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. File a free tax extension   The other way is to deduct the loss separately. File a free tax extension If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. File a free tax extension Reduce the loss by the reimbursement you received. File a free tax extension Do not include the reimbursement in gross income. File a free tax extension If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. File a free tax extension Leased property. File a free tax extension   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. File a free tax extension Separate computations. File a free tax extension   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. File a free tax extension Then combine the losses to determine the total loss from that casualty or theft. File a free tax extension Exception for personal-use real property. File a free tax extension   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. File a free tax extension Figure the loss using the smaller of the following. File a free tax extension The decrease in FMV of the entire property. File a free tax extension The adjusted basis of the entire property. File a free tax extension   See Real property under Figuring the Deduction, later. File a free tax extension Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. File a free tax extension The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. File a free tax extension FMV of stolen property. File a free tax extension   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. File a free tax extension Example. File a free tax extension Several years ago, you purchased silver dollars at face value for $150. File a free tax extension This is your adjusted basis in the property. File a free tax extension Your silver dollars were stolen this year. File a free tax extension The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. File a free tax extension Your theft loss is $150. File a free tax extension Recovered stolen property. File a free tax extension   Recovered stolen property is your property that was stolen and later returned to you. File a free tax extension If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. File a free tax extension Use this amount to refigure your total loss for the year in which the loss was deducted. File a free tax extension   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. File a free tax extension But report the difference only up to the amount of the loss that reduced your tax. File a free tax extension For more information on the amount to report, see Recoveries in Publication 525. File a free tax extension Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. File a free tax extension However, other measures also can be used to establish certain decreases. File a free tax extension See Appraisal and Cost of cleaning up or making repairs , next. File a free tax extension Appraisal. File a free tax extension   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. File a free tax extension The appraiser must recognize the effects of any general market decline that may occur along with the casualty. File a free tax extension This information is needed to limit any deduction to the actual loss resulting from damage to the property. File a free tax extension   Several factors are important in evaluating the accuracy of an appraisal, including the following. File a free tax extension The appraiser's familiarity with your property before and after the casualty or theft. File a free tax extension The appraiser's knowledge of sales of comparable property in the area. File a free tax extension The appraiser's knowledge of conditions in the area of the casualty. File a free tax extension The appraiser's method of appraisal. File a free tax extension You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. File a free tax extension For more information on disasters, see Disaster Area Losses, later. File a free tax extension Cost of cleaning up or making repairs. File a free tax extension   The cost of repairing damaged property is not part of a casualty loss. File a free tax extension Neither is the cost of cleaning up after a casualty. File a free tax extension But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. File a free tax extension The repairs are actually made. File a free tax extension The repairs are necessary to bring the property back to its condition before the casualty. File a free tax extension The amount spent for repairs is not excessive. File a free tax extension The repairs take care of the damage only. File a free tax extension The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. File a free tax extension Landscaping. File a free tax extension   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. File a free tax extension You may be able to measure your loss by what you spend on the following. File a free tax extension Removing destroyed or damaged trees and shrubs, minus any salvage you receive. File a free tax extension Pruning and other measures taken to preserve damaged trees and shrubs. File a free tax extension Replanting necessary to restore the property to its approximate value before the casualty. File a free tax extension Car value. File a free tax extension   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. File a free tax extension You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. File a free tax extension The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. File a free tax extension If your car is not listed in the books, determine its value from other sources. File a free tax extension A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. File a free tax extension Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. File a free tax extension Cost of protection. File a free tax extension   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. File a free tax extension The amount you spend on insurance or to board up your house against a storm is not part of your loss. File a free tax extension If the property is business property, these expenses are deductible as business expenses. File a free tax extension   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. File a free tax extension An example would be the cost of a dike to prevent flooding. File a free tax extension Exception. File a free tax extension   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). File a free tax extension Related expenses. File a free tax extension   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. File a free tax extension However, they may be deductible as business expenses if the damaged or stolen property is business property. File a free tax extension Replacement cost. File a free tax extension   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. File a free tax extension Example. File a free tax extension You bought a new chair 4 years ago for $300. File a free tax extension In April, a fire destroyed the chair. File a free tax extension You estimate that it would cost $500 to replace it. File a free tax extension If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. File a free tax extension The chair was not insured. File a free tax extension Your loss is $100, the FMV of the chair before the fire. File a free tax extension It is not $500, the replacement cost. File a free tax extension Sentimental value. File a free tax extension   Do not consider sentimental value when determining your loss. File a free tax extension If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. File a free tax extension Decline in market value of property in or near casualty area. File a free tax extension   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. File a free tax extension You have a loss only for actual casualty damage to your property. File a free tax extension However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. File a free tax extension Costs of photographs and appraisals. File a free tax extension   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. File a free tax extension Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. File a free tax extension   Appraisals are used to figure the decrease in FMV because of a casualty or theft. File a free tax extension See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. File a free tax extension   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. File a free tax extension They are expenses in determining your tax liability. File a free tax extension You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). File a free tax extension Adjusted Basis The measure of your investment in the property you own is its basis. File a free tax extension For property you buy, your basis is usually its cost to you. File a free tax extension For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. File a free tax extension If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. File a free tax extension Adjustments to basis. File a free tax extension    While you own the property, various events may take place that change your basis. File a free tax extension Some events, such as additions or permanent improvements to the property, increase basis. File a free tax extension Others, such as earlier casualty losses and depreciation deductions, decrease basis. File a free tax extension When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. File a free tax extension See Publication 551 for more information on figuring the basis of your property. File a free tax extension Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. File a free tax extension You do not have a casualty or theft loss to the extent you are reimbursed. File a free tax extension If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. File a free tax extension You must reduce your loss even if you do not receive payment until a later tax year. File a free tax extension See Reimbursement Received After Deducting Loss , later. File a free tax extension Failure to file a claim for reimbursement. File a free tax extension   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. File a free tax extension Otherwise, you cannot deduct this loss as a casualty or theft. File a free tax extension The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. File a free tax extension Example. File a free tax extension You have a car insurance policy with a $1,000 deductible. File a free tax extension Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). File a free tax extension This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. File a free tax extension Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. File a free tax extension Other types of reimbursements are discussed next. File a free tax extension Also see the Instructions for Form 4684. File a free tax extension Employer's emergency disaster fund. File a free tax extension   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. File a free tax extension Take into consideration only the amount you used to replace your destroyed or damaged property. File a free tax extension Example. File a free tax extension Your home was extensively damaged by a tornado. File a free tax extension Your loss after reimbursement from your insurance company was $10,000. File a free tax extension Your employer set up a disaster relief fund for its employees. File a free tax extension Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. File a free tax extension You received $4,000 from the fund and spent the entire amount on repairs to your home. File a free tax extension In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. File a free tax extension Your casualty loss before applying the deduction limits (discussed later) is $6,000. File a free tax extension Cash gifts. File a free tax extension   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. File a free tax extension This applies even if you use the money to pay for repairs to property damaged in the disaster. File a free tax extension Example. File a free tax extension Your home was damaged by a hurricane. File a free tax extension Relatives and neighbors made cash gifts to you that were excludable from your income. File a free tax extension You used part of the cash gifts to pay for repairs to your home. File a free tax extension There were no limits or restrictions on how you could use the cash gifts. File a free tax extension It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. File a free tax extension Insurance payments for living expenses. File a free tax extension   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. File a free tax extension You lose the use of your main home because of a casualty. File a free tax extension Government authorities do not allow you access to your main home because of a casualty or threat of one. File a free tax extension Inclusion in income. File a free tax extension   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. File a free tax extension Report this amount on Form 1040, line 21. File a free tax extension However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. File a free tax extension See Qualified disaster relief payments , later, under Disaster Area Losses. File a free tax extension   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. File a free tax extension Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. File a free tax extension Generally, these expenses include the amounts you pay for the following. File a free tax extension Renting suitable housing. File a free tax extension Transportation. File a free tax extension Food. File a free tax extension Utilities. File a free tax extension Miscellaneous services. File a free tax extension Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. File a free tax extension Example. File a free tax extension As a result of a fire, you vacated your apartment for a month and moved to a motel. File a free tax extension You normally pay $525 a month for rent. File a free tax extension None was charged for the month the apartment was vacated. File a free tax extension Your motel rent for this month was $1,200. File a free tax extension You normally pay $200 a month for food. File a free tax extension Your food expenses for the month you lived in the motel were $400. File a free tax extension You received $1,100 from your insurance company to cover your living expenses. File a free tax extension You determine the payment you must include in income as follows. File a free tax extension 1. File a free tax extension Insurance payment for living expenses $1,100 2. File a free tax extension Actual expenses during the month you are unable to use your home because of the fire $1,600   3. File a free tax extension Normal living expenses 725   4. File a free tax extension Temporary increase in living expenses: Subtract line 3  from line 2 875 5. File a free tax extension Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. File a free tax extension   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. File a free tax extension Example. File a free tax extension Your main home was destroyed by a tornado in August 2011. File a free tax extension You regained use of your home in November 2012. File a free tax extension The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. File a free tax extension You include this amount in income on your 2012 Form 1040. File a free tax extension If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. File a free tax extension Disaster relief. File a free tax extension   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. File a free tax extension Table 2. File a free tax extension Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. File a free tax extension Apply this rule to personal-use property after you have figured the amount of your loss. File a free tax extension You must reduce your total casualty or theft loss by 10% of your adjusted gross income. File a free tax extension Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). File a free tax extension You must reduce your total casualty or theft loss by 2% of your adjusted gross income. File a free tax extension Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. File a free tax extension Single Event Apply this rule only once, even if many pieces of property are affected. File a free tax extension Apply this rule only once, even if many pieces of property are affected. File a free tax extension Apply this rule only once, even if many pieces of property are affected. File a free tax extension More Than One Event Apply to the loss from each event. File a free tax extension Apply to the total of all your losses from all events. File a free tax extension Apply to the total of all your losses from all events. File a free tax extension More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. File a free tax extension Apply separately to each person. File a free tax extension Apply separately to each person. File a free tax extension Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. File a free tax extension Apply as if you were one person. File a free tax extension Apply as if you were one person. File a free tax extension Filing Separate Return Apply separately to each spouse. File a free tax extension Apply separately to each spouse. File a free tax extension Apply separately to each spouse. File a free tax extension More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. File a free tax extension Apply separately to each owner of jointly owned property. File a free tax extension Apply separately to each owner of jointly owned property. File a free tax extension    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. File a free tax extension For more information, see Qualified disaster relief payments under Disaster Area Losses, later. File a free tax extension   Disaster unemployment assistance payments are unemployment benefits that are taxable. File a free tax extension   Generally, disaster relief grants received under the Robert T. File a free tax extension Stafford Disaster Relief and Emergency Assistance Act are not included in your income. File a free tax extension See Federal disaster relief grants , later, under Disaster Area Losses. File a free tax extension Loan proceeds. File a free tax extension   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. File a free tax extension If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. File a free tax extension Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. File a free tax extension This section explains the adjustment you may have to make. File a free tax extension Actual reimbursement less than expected. File a free tax extension   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. File a free tax extension Example. File a free tax extension Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. File a free tax extension The accident was due to the negligence of the other driver. File a free tax extension At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. File a free tax extension You did not have a deductible loss in 2012. File a free tax extension In January 2013, the court awards you a judgment of $2,000. File a free tax extension However, in July it becomes apparent that you will be unable to collect any amount from the other driver. File a free tax extension Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). File a free tax extension Actual reimbursement more than expected. File a free tax extension   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. File a free tax extension However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. File a free tax extension You do not refigure your tax for the year you claimed the deduction. File a free tax extension See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. File a free tax extension Example. File a free tax extension In 2012, a hurricane destroyed your motorboat. File a free tax extension Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. File a free tax extension You did not itemize deductions on your 2012 return, so you could not deduct the loss. File a free tax extension When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. File a free tax extension This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. File a free tax extension The loss did not reduce your tax. File a free tax extension    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. File a free tax extension If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. File a free tax extension Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. File a free tax extension You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. File a free tax extension Actual reimbursement same as expected. File a free tax extension   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. File a free tax extension Example. File a free tax extension In December 2013, you had a collision while driving your personal car. File a free tax extension Repairs to the car cost $950. File a free tax extension You had $100 deductible collision insurance. File a free tax extension Your insurance company agreed to reimburse you for the rest of the damage. File a free tax extension Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. File a free tax extension Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. File a free tax extension When you receive the $850 from the insurance company in 2014, do not report it as income. File a free tax extension Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. File a free tax extension The deduction for casualty and theft losses of employee property and personal-use property is limited. File a free tax extension A loss on employee property is subject to the 2% rule, discussed next. File a free tax extension With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. File a free tax extension The 2%, $100, and 10% rules are also summarized in Table 2 . File a free tax extension Losses on business property (other than employee property) and income-producing property are not subject to these rules. File a free tax extension However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. File a free tax extension See the Instructions for Form 4684, Section B. File a free tax extension If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. File a free tax extension 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. File a free tax extension Employee property is property used in performing services as an employee. File a free tax extension $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. File a free tax extension This reduction applies to each total casualty or theft loss. File a free tax extension It does not matter how many pieces of property are involved in an event. File a free tax extension Only a single $100 reduction applies. File a free tax extension Example. File a free tax extension You have $750 deductible collision insurance on your car. File a free tax extension The car is damaged in a collision. File a free tax extension The insurance company pays you for the damage minus the $750 deductible. File a free tax extension The amount of the casualty loss is based solely on the deductible. File a free tax extension The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. File a free tax extension Single event. File a free tax extension   Generally, events closely related in origin cause a single casualty. File a free tax extension It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. File a free tax extension A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. File a free tax extension Example 1. File a free tax extension A thunderstorm destroyed your pleasure boat. File a free tax extension You also lost some boating equipment in the storm. File a free tax extension Your loss was $5,000 on the boat and $1,200 on the equipment. File a free tax extension Your insurance company reimbursed you $4,500 for the damage to your boat. File a free tax extension You had no insurance coverage on the equipment. File a free tax extension Your casualty loss is from a single event and the $100 rule applies once. File a free tax extension Figure your loss before applying the 10% rule (discussed later) as follows. File a free tax extension     Boat Equipment 1. File a free tax extension Loss $5,000 $1,200 2. File a free tax extension Subtract insurance 4,500 -0- 3. File a free tax extension Loss after reimbursement $ 500 $1,200 4. File a free tax extension Total loss $1,700 5. File a free tax extension Subtract $100 100 6. File a free tax extension Loss before 10% rule $1,600 Example 2. File a free tax extension Thieves broke into your home in January and stole a ring and a fur coat. File a free tax extension You had a loss of $200 on the ring and $700 on the coat. File a free tax extension This is a single theft. File a free tax extension The $100 rule applies to the total $900 loss. File a free tax extension Example 3. File a free tax extension In September, hurricane winds blew the roof off your home. File a free tax extension Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. File a free tax extension This is considered a single casualty. File a free tax extension The $100 rule is applied to your total loss from the flood waters and the wind. File a free tax extension More than one loss. File a free tax extension   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. File a free tax extension Example. File a free tax extension Your family car was damaged in an accident in January. File a free tax extension Your loss after the insurance reimbursement was $75. File a free tax extension In February, your car was damaged in another accident. File a free tax extension This time your loss after the insurance reimbursement was $90. File a free tax extension Apply the $100 rule to each separate casualty loss. File a free tax extension Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. File a free tax extension More than one person. File a free tax extension   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. File a free tax extension Example. File a free tax extension A fire damaged your house and also damaged the personal property of your house guest. File a free tax extension You must reduce your loss by $100. File a free tax extension Your house guest must reduce his or her loss by $100. File a free tax extension Married taxpayers. File a free tax extension   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. File a free tax extension It does not matter whether you own the property jointly or separately. File a free tax extension   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. File a free tax extension This is true even if you own the property jointly. File a free tax extension If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. File a free tax extension   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. File a free tax extension Neither of you can figure your deduction on the entire loss on a separate return. File a free tax extension Each of you must reduce the loss by $100. File a free tax extension More than one owner. File a free tax extension   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. File a free tax extension For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. File a free tax extension 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. File a free tax extension Apply this rule after you reduce each loss by $100. File a free tax extension For more information, see the Form 4684 instructions. File a free tax extension If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. File a free tax extension Example. File a free tax extension In June, you discovered that your house had been burglarized. File a free tax extension Your loss after insurance reimbursement was $2,000. File a free tax extension Your adjusted gross income for the year you discovered the theft is $29,500. File a free tax extension Figure your theft loss as follows. File a free tax extension 1. File a free tax extension Loss after insurance $2,000 2. File a free tax extension Subtract $100 100 3. File a free tax extension Loss after $100 rule $1,900 4. File a free tax extension Subtract 10% of $29,500 AGI $2,950 5. File a free tax extension Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). File a free tax extension More than one loss. File a free tax extension   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. File a free tax extension Then you must reduce the total of all your losses by 10% of your adjusted gross income. File a free tax extension Example. File a free tax extension In March, you had a car accident that totally destroyed your car. File a free tax extension You did not have collision insurance on your car, so you did not receive any insurance reimbursement. File a free tax extension Your loss on the car was $1,800. File a free tax extension In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. File a free tax extension Your loss on the basement items after reimbursement was $2,100. File a free tax extension Your adjusted gross income for the year that the accident and fire occurred is $25,000. File a free tax extension You figure your casualty loss deduction as follows. File a free tax extension     Car Basement 1. File a free tax extension Loss $1,800 $2,100 2. File a free tax extension Subtract $100 per incident 100 100 3. File a free tax extension Loss after $100 rule $1,700 $2,000 4. File a free tax extension Total loss $3,700 5. File a free tax extension Subtract 10% of $25,000 AGI 2,500 6. File a free tax extension Casualty loss deduction $1,200 Married taxpayers. File a free tax extension   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. File a free tax extension It does not matter if you own the property jointly or separately. File a free tax extension   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. File a free tax extension More than one owner. File a free tax extension   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. File a free tax extension Gains and losses. File a free tax extension   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. File a free tax extension Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. File a free tax extension Casualty or theft gains do not include gains you choose to postpone. File a free tax extension See Postponement of Gain, later. File a free tax extension Losses more than gains. File a free tax extension   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. File a free tax extension The rest, if any, is your deductible loss from personal-use property. File a free tax extension Example. File a free tax extension Your theft loss after reducing it by reimbursements and by $100 is $2,700. File a free tax extension Your casualty gain is $700. File a free tax extension Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. File a free tax extension Gains more than losses. File a free tax extension   If your recognized gains are more than your losses, subtract your losses from your gains. File a free tax extension The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). File a free tax extension The 10% rule does not apply to your gains. File a free tax extension Example. File a free tax extension Your theft loss is $600 after reducing it by reimbursements and by $100. File a free tax extension Your casualty gain is $1,600. File a free tax extension Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). File a free tax extension More information. File a free tax extension   For information on how to figure recognized gains, see Figuring a Gain , later. File a free tax extension Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. File a free tax extension However, a special rule applies to real property you own for personal use. File a free tax extension Real property. File a free tax extension   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. File a free tax extension Example 1. File a free tax extension In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. File a free tax extension (Your land was not damaged. File a free tax extension ) This was your only casualty or theft loss for the year. File a free tax extension The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). File a free tax extension The FMV immediately after the fire was $35,000 (value of the land). File a free tax extension You collected $130,000 from the insurance company. File a free tax extension Your adjusted gross income for the year the fire occurred is $80,000. File a free tax extension Your deduction for the casualty loss is $6,700, figured in the following manner. File a free tax extension 1. File a free tax extension Adjusted basis of the entire property (cost in this example) $144,800 2. File a free tax extension FMV of entire property  before fire $180,000 3. File a free tax extension FMV of entire property after fire 35,000 4. File a free tax extension Decrease in FMV of entire property (line 2 − line 3) $145,000 5. File a free tax extension Loss (smaller of line 1 or line 4) $144,800 6. File a free tax extension Subtract insurance 130,000 7. File a free tax extension Loss after reimbursement $14,800 8. File a free tax extension Subtract $100 100 9. File a free tax extension Loss after $100 rule $14,700 10. File a free tax extension Subtract 10% of $80,000 AGI 8,000 11. File a free tax extension Casualty loss deduction $ 6,700 Example 2. File a free tax extension You bought your home a few years ago. File a free tax extension You paid $150,000 ($10,000 for the land and $140,000 for the house). File a free tax extension You also spent an additional $2,000 for landscaping. File a free tax extension This year a fire destroyed your home. File a free tax extension The fire also damaged the shrubbery and trees in your yard. File a free tax extension The fire was your only casualty or theft loss this year. File a free tax extension Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. File a free tax extension Shortly after the fire, the insurance company paid you $95,000 for the loss. File a free tax extension Your adjusted gross income for this year is $70,000. File a free tax extension You figure your casualty loss deduction as follows. File a free tax extension 1. File a free tax extension Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. File a free tax extension FMV of entire property  before fire $175,000 3. File a free tax extension FMV of entire property after fire 50,000 4. File a free tax extension Decrease in FMV of entire property (line 2 − line 3) $125,000 5. File a free tax extension Loss (smaller of line 1 or line 4) $125,000 6. File a free tax extension Subtract insurance 95,000 7. File a free tax extension Loss after reimbursement $30,000 8. File a free tax extension Subtract $100 100 9. File a free tax extension Loss after $100 rule $29,900 10. File a free tax extension Subtract 10% of $70,000 AGI 7,000 11. File a free tax extension Casualty loss deduction $ 22,900 Personal property. File a free tax extension   Personal property is any property that is not real property. File a free tax extension If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. File a free tax extension Then combine these separate losses to figure the total loss. File a free tax extension Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. File a free tax extension Example 1. File a free tax extension In August, a storm destroyed your pleasure boat, which cost $18,500. File a free tax extension This was your only casualty or theft loss for the year. File a free tax extension Its FMV immediately before the storm was $17,000. File a free tax extension You had no insurance, but were able to salvage the motor of the boat and sell it for $200. File a free tax extension Your adjusted gross income for the year the casualty occurred is $70,000. File a free tax extension Although the motor was sold separately, it is part of the boat and not a separate item of property. File a free tax extension You figure your casualty loss deduction as follows. File a free tax extension 1. File a free tax extension Adjusted basis (cost in this example) $18,500 2. File a free tax extension FMV before storm $17,000 3. File a free tax extension FMV after storm 200 4. File a free tax extension Decrease in FMV  (line 2 − line 3) $16,800 5. File a free tax extension Loss (smaller of line 1 or line 4) $16,800 6. File a free tax extension Subtract insurance -0- 7. File a free tax extension Loss after reimbursement $16,800 8. File a free tax extension Subtract $100 100 9. File a free tax extension Loss after $100 rule $16,700 10. File a free tax extension Subtract 10% of $70,000 AGI 7,000 11. File a free tax extension Casualty loss deduction $ 9,700 Example 2. File a free tax extension In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. File a free tax extension You had bought the car for $30,000. File a free tax extension The FMV of the car just before the accident was $17,500. File a free tax extension Its FMV just after the accident was $180 (scrap value). File a free tax extension Your insurance company reimbursed you $16,000. File a free tax extension Your watch was not insured. File a free tax extension You had purchased it for $250. File a free tax extension Its FMV just before the accident was $500. File a free tax extension Your adjusted gross income for the year the accident occurred is $97,000. File a free tax extension Your casualty loss deduction is zero, figured as follows. File a free tax extension     Car Watch 1. File a free tax extension Adjusted basis (cost) $30,000 $250 2. File a free tax extension FMV before accident $17,500 $500 3. File a free tax extension FMV after accident 180 -0- 4. File a free tax extension Decrease in FMV (line 2 − line 3) $17,320 $500 5. File a free tax extension Loss (smaller of line 1 or line 4) $17,320 $250 6. File a free tax extension Subtract insurance 16,000 -0- 7. File a free tax extension Loss after reimbursement $1,320 $250 8. File a free tax extension Total loss $1,570 9. File a free tax extension Subtract $100 100 10. File a free tax extension Loss after $100 rule $1,470 11. File a free tax extension Subtract 10% of $97,000 AGI 9,700 12. File a free tax extension Casualty loss deduction $ -0- Both real and personal properties. File a free tax extension   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. File a free tax extension However, you apply a single $100 reduction to the total loss. File a free tax extension Then, you apply the 10% rule to figure the casualty loss deduction. File a free tax extension Example. File a free tax extension In July, a hurricane damaged your home, which cost you $164,000 including land. File a free tax extension The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. File a free tax extension Your household furnishings were also damaged. File a free tax extension You separately figured the loss on each damaged household item and arrived at a total loss of $600. File a free tax extension You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. File a free tax extension Your adjusted gross income for the year the hurricane occurred is $65,000. File a free tax extension You figure your casualty loss deduction from the hurricane in the following manner. File a free tax extension 1. File a free tax extension Adjusted basis of real property (cost in this example) $164,000 2. File a free tax extension FMV of real property before hurricane $170,000 3. File a free tax extension FMV of real property after hurricane 100,000 4. File a free tax extension Decrease in FMV of real property (line 2 − line 3) $70,000 5. File a free tax extension Loss on real property (smaller of line 1 or line 4) $70,000 6. File a free tax extension Subtract insurance 50,000 7. File a free tax extension Loss on real property after reimbursement $20,000 8. File a free tax extension Loss on furnishings $600 9. File a free tax extension Subtract insurance -0- 10. File a free tax extension Loss on furnishings after reimbursement $600 11. File a free tax extension Total loss (line 7 plus line 10) $20,600 12. File a free tax extension Subtract $100 100 13. File a free tax extension Loss after $100 rule $20,500 14. File a free tax extension Subtract 10% of $65,000 AGI 6,500 15. File a free tax extension Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. File a free tax extension   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. File a free tax extension You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. File a free tax extension When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. File a free tax extension The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. File a free tax extension Example. File a free tax extension You own a building that you constructed on leased land. File a free tax extension You use half of the building for your business and you live in the other half. File a free tax extension The cost of the building was $400,000. File a free tax extension You made no further improvements or additions to it. File a free tax extension A flood in March damaged the entire building. File a free tax extension The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. File a free tax extension Your insurance company reimbursed you $40,000 for the flood damage. File a free tax extension Depreciation on the business part of the building before the flood totaled $24,000. File a free tax extension Your adjusted gross income for the year the flood occurred is $125,000. File a free tax extension You have a deductible business casualty loss of $10,000. File a free tax extension You do not have a deductible personal casualty loss because of the 10% rule. File a free tax extension You figure your loss as follows. File a free tax extension     Business   Personal     Part   Part 1. File a free tax extension Cost (total $400,000) $200,000   $200,000 2. File a free tax extension Subtract depreciation 24,000   -0- 3. File a free tax extension Adjusted basis $176,000   $200,000 4. File a free tax extension FMV before flood (total $380,000) $190,000   $190,000 5. File a free tax extension FMV after flood (total $320,000) 160,000   160,000 6. File a free tax extension Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. File a free tax extension Loss (smaller of line 3 or line 6) $30,000   $30,000 8. File a free tax extension Subtract insurance 20,000   20,000 9. File a free tax extension Loss after reimbursement $10,000   $10,000 10. File a free tax extension Subtract $100 on personal-use property -0-   100 11. File a free tax extension Loss after $100 rule $10,000   $9,900 12. File a free tax extension Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. File a free tax extension Deductible business loss $10,000     14. File a free tax extension Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. File a free tax extension Your gain is figured as follows. File a free tax extension The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. File a free tax extension See Adjusted Basis , earlier, for information on adjusted basis. File a free tax extension Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. File a free tax extension Amount you receive. File a free tax extension   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. File a free tax extension It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. File a free tax extension Example. File a free tax extension A hurricane destroyed your personal residence and the insurance company awarded you $145,000. File a free tax extension You received $140,000 in cash. File a free tax extension The remaining $5,000 was paid directly to the holder of a mortgage on the property. File a free tax extension The amount you received includes the $5,000 reimbursement paid on the mortgage. File a free tax extension Main home destroyed. File a free tax extension   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. File a free tax extension You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). File a free tax extension To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. File a free tax extension For information on this exclusion, see Publication 523. File a free tax extension If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. File a free tax extension See Postponement of Gain , later. File a free tax extension Reporting a gain. File a free tax extension   You generally must report your gain as income in the year you receive the reimbursement. File a free tax extension However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. File a free tax extension   For information on how to report a gain, see How To Report Gains and Losses , later. File a free tax extension    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. File a free tax extension See 10% Rule under Deduction Limits, earlier. File a free tax extension Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. File a free tax extension Your basis in the new property is generally the same as your adjusted basis in the property it replaces. File a free tax extension You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. File a free tax extension However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. File a free tax extension You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. File a free tax extension See Controlling interest in a corporation , later. File a free tax extension If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. File a free tax extension To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. File a free tax extension If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. File a free tax extension Example. File a free tax extension In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. File a free tax extension You made no further improvements or additions to it. File a free tax extension When a storm destroyed the cottage this January, the cottage was worth $250,000. File a free tax extension You received $146,000 from the insurance company in March. File a free tax extension You had a gain of $128,000 ($146,000 − $18,000). File a free tax extension You spent $144,000 to rebuild the cottage. File a free tax extension Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. File a free tax extension Buying replacement property from a related person. File a free tax extension   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). File a free tax extension This rule applies to the following taxpayers. File a free tax extension C corporations. File a free tax extension Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. File a free tax extension All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. File a free tax extension For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. File a free tax extension If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. File a free tax extension If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. File a free tax extension Exception. File a free tax extension   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. File a free tax extension Related persons. File a free tax extension   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. File a free tax extension For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. File a free tax extension Death of a taxpayer. File a free tax extension   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. File a free tax extension The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. File a free tax extension Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. File a free tax extension Property you acquire as a gift or inheritance does not qualify. File a free tax extension You do not have to use the same funds you receive as