Tax-Deductible Losses - Essay Example

Assignment 2: Tax-Deductible Losses Assignment 2: Tax-Deductible Losses Introduction Tax deductable losses refer to the certified losses for deduction in order to meet tax provisions. As such, according to the Internal Revenue Code of the United States, certain losses are deductible for tax purposes. Therefore, such a loss must meet a particular set criterion in order for it to qualify as a deductable loss under taxation. For instance, such a loss should not be compensated by insurance in order to qualify as a tax deductible loss. Furthermore, that particular loss must be sustained within the fiscal year under consideration for taxation. The code further goes ahead to stipulate the provisions of the tax deductible losses, in such a way that it lays down strict and specific conditions that define a tax deductable loss. Therefore, for a loss to qualify for deduction, it has to meet these criteria, and if not, it would be illegal to deduct the loss from taxation, an offense punishable by law as a tax evasion crime. The Internal Revenue Code stipulates that the tax deductable loss has to come about as a resultant effect of events or actions that are sudden, damaging, unexpected, identifiable, as well as unusual in nature, especially in the event such a loss is a theft or a casualty of either personal property or family property, or the living property of the tax payer in questions seeking to present the loss as a deductible loss. Good examples of natural tragedies that qualify for tax deductible losses include floods, tornadoes, as well as hurricanes. This is because these events are sudden and unexpected, and they also bring about significant losses to the property of the taxpayer. In addition, these events are beyond the control of the taxpayer, and as such, are unavoidable in the event they occur during a given taxable year. Consequently, it is also imperative to consider some losses that accrue to tax payers that are not in themselves tax deductibles. For instance, a house suffering from termite damage does not qualify as a tax deductible because the loss occurs gradually and progressively. As such, the taxpayer is aware of the loss at the time it begins to occur all the way through to the completion of the destructions. Therefore, it is believed that the taxpayer has an opportunity to prevent this loss from happening, or at least stop it from expanding after he or she realizes its presence, thereby disqualifying it as a tax deductible loss. A tax deductible loss is usually reduced by $ 100 per event, and as such, the total loss might be reduced by the 10% of adjusted gross income floor (Ault, McDaniel and Repeti, 2005). Introduction of Tax Deductible Losses into the U.S. Tax Code The tax deductible losses became part of the U.S. Tax Code following the passage of the Tax Reform Act of 1986 under President Ronald Reagan’s regime. This act came into law in an effort by the federal government to ease the tax burden and impact on Americans citizens, as well as enabling them to better their living standards as these deductions would increase their available disposable incomes. As such, the Internal Revenue Code structured a number of features to specify the qualification of these tax deductible losses, such as the loss being as a result of an unexpected event that the taxpayer has no control over, and leads to significant losses on property, such as floods and hurricanes. I consider it reasonable for the Tax Reform Act of 1986 to introduce the tax deductible losses, especially for personal income taxes, as well as special cases for businesses and corporations that suffer such losses. This is because the occurrence of such catastrophic events is not in the control of the taxpayer. As such, in the event these catastrophes strike and destroy or damage the property of the taxpayer, he or she will suffer significant losses. Therefore, he or she will require more capital, additional capital in order to recover from these losses. As such, the introduction of the tax deductible losses is essential as it enables such tax payers to recover from these losses by reducing the amount of taxes they file to the tax payer, especially in the year which they suffered the loss, with an exact or a percentage value of the loss suffered. Significance of Tax Deductible Losses As mentioned above, a loss only qualifies to be a tax deductible loss in the event it meets the criteria and requirements set by the Internal Revenue Code with regards to tax deductible losses. For one, the loss has to lead to significant damage of the property of the tax payer, thereby reducing him or her financially. Furthermore, the occurrence of the loss has to be from an event that the tax payer does not have control over, and an event that is sudden and unplanned for, or unexpected. For instance, a natural catastrophe can be destructive with the tax payer having little control over it, but it can be planned for, such as through weather forecasts and climate warnings. Therefore, in the event the meteorological department issues a weather warning, such as a severe thunderstorm warning and the tax payer refuses to head to such a warning by evacuating the area of danger in time, thereby suffering a loss through the damages caused by the thunderstorm, this particular case does not qualify for a tax deductible loss. Therefore, I believe that these tax deductible losses are significant because they enable a tax payer recover from his or her losses. As such, these deductions are quite beneficial to the tax payers concerned since it enables them have a significant disposable income available as a result of paying lower taxes. However, these deductions generally harm other tax payers as they have to pay their full amount of tax expense while those qualifying for tax deductions pay less. In order to introduce fairness to all tax payers, such a tax deductible loss should come along with tax incentives for those who did not suffer the losses during that taxable year, and as such, reducing their tax burden (Bankman, Griffith and Pratt, 2008). Qualification of Gambling Losses as Tax Deductible Losses Under normal circumstances, a casualty qualifies as a tax deductible loss. However, this casualty ceases to be a tax deductible loss in the event the events leading to the occurrence of the particular casualty were avoidable or planned. For instance, a fire gutting down a house is a casualty that leads to significant losses to the tax payer, and as such, qualify for tax deductible loss. However, this is only the case if the occurrence of the fire was because of a natural cause, or accidental rather than intentional. If a person willfully and knowingly puts his or her property on fire with the goal of claiming tax deductible losses then this is wrong, as the casualty does not qualify for deductions. Therefore, such a casualty is disallowed despite the fact that the tax payer suffers a significant loss from its occurrence. This is a good provision of the revenue code as people would want to take advantage of these tax deductions by intentionally causing a casualty in order to claim tax deductible losses. Alternative to Tax Deductible Losses Although tax deductible losses are good as they favor those who genuinely suffer from these losses and damages caused by unexpected catastrophic events, they are bad because they reduce the amount of revenue collected by the tax authority for use in development activities throughout the country. Furthermore, they are also unfair to other tax payers, especially those who do not suffer such catastrophes and as such, must pay the full amount of their taxes. Therefore, the best alternative for such tax deductible losses, since its main intention is to reimburse the taxpayer for the losses he or she suffered due to damage or loss from unexpected events is to get an insurance cover for the property of the taxpayer against such losses caused by floods, tornadoes, as well as hurricanes. An insurance cover will enable a tax payer to get back to his or her feet after suffering from such a loss as it would compensate him or her for the value of loss or the amount of damages suffered, especially considering the fact that these losses were accidental, unexpected, and unplanned for. Therefore, the federal government gets to collect the full taxes it intended to collect, and all tax payers pay the same amount of taxes to the government thereby creating fairness (Laurin, Majnoni and World Bank, 2003). Frequent Types of Deductible Losses Car accidents are the most common types of tax deductible losses reported to the Internal Revenue Authority for tax deduction. This is because most people who end up being involved in car accidents tend to claim the damages and losses that they suffer as tax deductible losses. However, not all accidents occur naturally, or because or natural events, such a severe storms, or fogs and mist thereby causing poor vision for motorists using these roads, or floods on the roads. Some of these accidents, and a good number for that matter, occur because of carelessness of the motorists, or other road users. Therefore, such a car accident should not qualify for a tax deductible loss, thereby tantamount for audit and investigation by the IRS audit team. This will enable the IRS determine whether the loss suffered is genuine or a mere fabrication of the motorist to claim reimbursement of the taxable losses. References Ault, H., McDaniel, P., & Repeti, J. (2005). Introduction to United States International Taxation. London: Kluwer Law International. Baankman, J., Griffith, T. & Pratt, K. (2008). Federal Income Tax: Examples and Explanations. New York: Aspen Publishers. Laurin, A., Majnoni, G., & World Bank. (2003). Bank Loan Classification And Provisioning Practices In Selected Developed And Emerging Countries. Washington D.C: World Bank Publications. Read More