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Every year, roughly one in three American taxpayers choose to itemize deductions as opposed to claiming the standard deduction -- which, for 2014, amounts to $6,200 for single filers and $12,400 for married couples filing jointly. They do so despite the added hassle because, obviously, it allows them to pay less in federal income taxes. In 2012, the latest year comprehensive income tax data is publicly available, the average mortgage interest deduction alone added up to $9,547 versus that year's standard deduction of $5,950 for single filers.
But while the mortgage interest deduction may be the best-known itemized deduction, it's far from the most lucrative. That title goes instead to the less frequently claimed deduction for losses stemming from a casualty or theft.
The IRS defines these terms in Tax Topic 515:
A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected or unusual event such as a flood, hurricane, tornado, fire, earthquake or volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.
A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.
In 2012, the average deduction for casualty or theft loss amounted to $30,982, making it far and away the biggest itemized deduction in terms of the average absolute dollar amount. It was more than three times the average mortgage interest deduction, and more than five times the corresponding standard deduction for single filers.
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The runner-up in terms of the average absolute dollar amount was the deduction for gambling losses, which came in at $19,164. The deduction for state and local taxes came in third, at $10,680. And skipping over the already discussed mortgage interest deduction, the write-off for medical and dental expenses rounded out the top five, at an average of $8,351 per tax return.
Now, just to be clear, while the casualty and loss deduction was the largest legal tax write-off two years ago, it wasn't the most popular. It was, in fact, one of the least frequently claimed deductions among the ones specifically enumerated on Schedule A of Form 1040, the worksheet for itemized deductions.
In 2012, the casualty and loss deduction was claimed on only 159,624 income tax returns according to the IRS's Statistics of Income database. That equated to 0.35% of all tax returns with itemized deductions, and only 0.11% of all tax returns combined. By contrast, 45.2 million returns claimed a deduction for state and local taxes, 37.4 million did so for charitable contributions, and 34.8 million did so for mortgage interest expense.
The point being, if you do decide to use the casualty and loss deduction, then you should do so in good faith and with adequate proof of loss as, given its average size, it isn't unreasonable to think that the IRS closely scrutinizes its use.
The article Heres the Single Biggest Itemized Tax Deduction originally appeared on Fool.com.
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