Is Identity Theft Protection Tax Deductible?
Decipher IRS rules on identity theft protection services and post-theft expenses. Learn what's deductible and how tax laws affect your finances.
When considering the tax implications of identity theft, many individuals wonder if the expenses incurred for protection services or recovery efforts can reduce their tax burden. The Internal Revenue Service (IRS) provides specific guidelines on what costs, if any, are deductible. Understanding these rules is important for anyone navigating the complexities of personal finance and potential threats to their identity. This article clarifies the IRS’s position on various costs associated with identity theft.
Deductibility of Identity Theft Protection Services
Generally, the costs associated with preventative identity theft protection services are not deductible for individual taxpayers. Services such as credit monitoring, identity theft insurance premiums, and proactive identity restoration services are typically categorized by the IRS as personal expenses. Personal expenses are not eligible for tax deductions.
The Tax Cuts and Jobs Act (TCJA) of 2017 suspended miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) floor for tax years 2018 through 2025. This legislation means that many identity theft related costs, which might have been partially deductible before, are no longer deductible for most individuals.
While individual taxpayers usually cannot deduct these preventative costs, businesses operate under different rules. Businesses can deduct identity theft protection services if they are ordinary and necessary business expenses, such as protecting sensitive data or providing them as an employee benefit. If an employer provides identity theft protection services to employees, the value of these services is generally not included in the employee’s taxable income.
Deductibility of Costs Following Identity Theft
In contrast to preventative services, certain unreimbursed costs incurred after identity theft may be deductible. These expenses are typically treated as casualty and theft losses. Examples include legal fees to recover stolen assets, fees to restore one’s identity, or notarization fees directly resulting from the theft.
However, stringent limitations apply to personal casualty and theft losses for individual taxpayers under current tax law. For tax years 2018 through 2025, personal casualty and theft losses are only deductible if they are attributable to a federally declared disaster.
Beyond the federally declared disaster area requirement, any eligible loss must also exceed certain thresholds. The deductible amount is reduced by $100 for each casualty or theft event. Additionally, the total amount of all personal casualty and theft losses must exceed 10% of your adjusted gross income (AGI) to be deductible. Only the portion of the loss that surpasses this 10% AGI threshold, after the $100 reduction, can be claimed.
Reporting Deductible Costs
Should an individual incur eligible costs following identity theft that meet the strict criteria for casualty and theft losses, these amounts are reported to the IRS. The initial step involves completing IRS Form 4684, “Casualties and Thefts,” to calculate the deductible loss based on specific rules.
After determining the deductible amount on Form 4684, this figure is then transferred to Schedule A (Form 1040), “Itemized Deductions.” To claim this deduction, taxpayers must choose to itemize their deductions rather than taking the standard deduction. The Tax Cuts and Jobs Act significantly increased the standard deduction amounts, which has resulted in fewer taxpayers finding it advantageous to itemize their deductions.