Casualty, Disaster, and Theft Tax Deduction

Casualty, Disaster, and Theft Tax Deduction

If you watch the news you will probably feel like there are major unexpected disasters happening every week. Unfortunately, you would still be underestimating the number of serious disasters in this country. FEMA actually tracks this data, and so far in 2016 there have been at least 69 declared disasters this year.

If you are not going to consult with a professional please review the IRS Pub 547 as it covers disasters, casualties, and thefts in-depth. A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It includes a major disaster or emergency declaration under the Act. It is true that you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return. There are always important distinctions and rules to follow. One issue that clients struggle with is not being able to deduct casualty and theft losses covered by insurance. You have to actually own the property to deduct the loss. You can be the person paying for the property, but if you are not the property owner the IRS will disallow all deductions.

What’s the difference between these losses? A casualty loss comes 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. This definition is a determining factor for clients on if you can qualify for casualty losses.

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. You might be thinking now you can deduct some stolen items like a cellphone, laptop, or jewelry. I wouldn’t get my hopes up high just yet. The amount of your theft loss is normally your adjusted basis of the property, because the fair market value of your property after the theft is considered to be zero.

Time to Deduct

Casualty losses are deductible in the year the casualty occurred. Casualty losses from a federally declared disaster that occurred in an area warranting public or individual assistance have the option to treat the casualty loss as having occurred in the previous year immediately preceding the tax year in which the disaster happened, or you can deduct the loss on your return for the preceding tax year.

Theft losses are normally deductible in the year you discover your property was stolen unless you have a chance of recovery through a claim for reimbursement. No deduction is available until the taxable year in which you can determine with reasonable certainty whether or not you will receive a reimbursement.

Casualty Property Type

Personal-use property or property that is not completely destroyed. Casualty losses are the smaller of:

  1. The adjusted basis of your property, or
  2. The decrease in fair market value of your property as a result of the casualty

Business or income-producing property that are completely destroyed losses is the adjusted basis.

Insurance or Other Reimbursements

You must reduce the loss first, whether it is a casualty or a theft loss by the salvage value and by any insurance or other reimbursements you receive or expect to receive. The adjusted basis of your property is the cost including any improvements or depreciation.

How to Claim Your Loss

Individuals have to claim their casualty and theft losses as an itemized deduction on Schedule A. You should have subtracted any salvage value, and any insurance or other reimbursement of Personal use property already. You must now subtract $100 from each casualty or theft event that occurred during the year and add them all up. 10% of your adjusted gross income is subtracted from the total to calculate your allowable casualty and theft losses for the year. Casualty and theft losses should be reported on Form 4684.

If your loss deduction is more than your income, you may have a net operating loss (NOL). The NOL is for individuals as well as business to have an NOL from a casualty the treatment is identical. Any unused portion of a casualty loss deduction can be carried back for three years, and then carried forward for 20 years until it’s used up. In a tax year you don’t have any income you can take advantage of the deduction in the future.