Mar 12, 2023
Natural disasters, thefts, and other unexpected events can cause significant financial losses for individuals and businesses. Fortunately, the IRS has provided some relief through tax deductions for designated damages. However, there are specific criteria that must be met in order to claim these deductions along with specifications for reporting them on your return. Here are some of the most common questions and answers to claiming casualty & theft losses on your return.
How do I know if my loss qualifies?
You can only deduct casualty and theft losses if they’re directly the result of an event that’s a federally declared disaster. Meaning, the President of the United States has officially declared the event a disaster. Federal disasters are often declared for areas heavily impacted by hurricanes, tornadoes, or floods. To view all federally declared disasters and related information, visit the IRS website.
There are 3 types of deductible losses allowed under the umbrella of federally declared disasters:
1. Federal casualty loss: The loss of personal use property due to a federally declared disaster. The loss must have occurred in the state receiving the disaster declaration.
2. Disaster loss: The loss of personal use or business property resulting from a federally declared disaster that occurred in a county eligible for public or individual assistance, or both.
3. Qualified disaster loss: The loss of personal use property due to a disaster declared under Section 401 of the Stafford Act, or several specific natural disasters or time periods.
Do theft losses qualify for deductions?
The IRS defines theft as the act of taking or removing property with the intention of depriving the owner of it. The act must also be illegal under state law. But as with the case of a casualty claim, the theft must have occurred due to a presidential disaster area declaration. For example, your city is struck by a tornado and the President declares it a disaster area. Subsequently, a thief accesses your home through a window broken by the storm and steals your car. One could argue the loss of the car was from theft due to a disaster.
Can I deduct a loss covered by insurance?
No, you cannot deduct casualty and theft losses covered by insurance, unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement. For more information, please review IRS Publication 547.
How do I calculate my loss?
Personal casualty and theft losses attributable to a federally declared disaster are subject to the $100 per casualty and 10% of your adjusted gross income (AGI) limitations unless they are attributable to a qualified disaster loss. Personal casualty and theft losses attributable to a qualified disaster loss are not subject to the 10% of the AGI limit and the $100 limit is increased to $500. An exception to the rule above, limiting the personal casualty and theft loss deduction to losses attributable to a federally declared disaster, applies if you have personal casualty gains for the tax year.
What form do I use to claim this deduction?
Casualty and theft losses are first reported and calculated on Form 4684. You will then report them on Form 1040, Schedule A.
Can I itemize this deduction?
For tax years 2018 through 2025, you can no longer claim casualty and theft losses on personal property as itemized deductions, unless your claim is caused by a federally declared disaster.
For tax years 2018 through 2025, personal casualty and theft losses may be deductible when: they are attributable to a federal disaster. For tax years beginning before 2018 and after 2025 personal casualty and theft losses may be deductible even if they are not attributable to a federal disaster.
In conclusion, claiming casualty and theft losses on your tax return can provide some relief for individuals and businesses that have suffered unexpected financial losses. It’s important to remember that only losses directly resulting from federally declared disasters are eligible for deduction. As with any tax-related issue, it’s always best to consult with your WVC tax professional to ensure that you are following the appropriate guidelines and maximizing your deductions.
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