A disaster can be bad enough – adding tax on top of that just makes things worse.
Fortunately, there’s a provision for that. Some casualty and theft losses are deductible. There are limitations, and there is the fine print, but at least it’s something.
This post goes through casualty and theft losses starting by defining the terms:
What Are Casualty Losses
If you’ve suffered from the damage, destruction, or loss of your property due to any sudden, unusual, or unexpected event, then your case can be classified as a casualty loss (or casualty). Such events can include natural disasters like hurricanes, floods, fires, tornadoes, earthquakes, and volcanic eruptions. A casualty excludes normal wear and tear or progressive deterioration.
What Are Theft Losses
Theft is said to have occurred if another party takes or removes your money or property with the intention of depriving you of it. To be legally considered theft, it must be unlawful in the state where it took place and be due to criminal intent.
The amount of theft loss is usually the adjusted basis of property because your property’s fair market value immediately after the theft is regarded as zero. Special rules may be applied by the IRS for theft losses from Ponzi investment schemes.
In the US, federally declared disasters are grouped into the following three categories:
- Federal casualty losses,
- Disaster losses and
- Qualified disaster losses
A federally declared disaster is a disaster that happens in a place designated or declared eligible for federal government assistance under Robert T. Stafford Disaster Relief and Emergency Assistance Act. A federally declared disaster includes:
- A major disaster declaration, or
- An emergency declaration under the Stafford Act
Federal Casualty Losses
A loss is said to be a federal casualty loss if a person’s casualty or theft loss of personal-use property is attributable to a federally declared disaster. The casualty loss must have taken place in states receiving a federal disaster declaration.
Federal casualty loss victims are eligible for a casualty loss deduction claim. Any casualty or theft loss of personal-use property that is not attributable to a federally declared disaster does not qualify as a federal casualty loss, meaning that you are ineligible to claim a casualty loss deduction (unless the exception applies).
Disaster Losses
A disaster loss is any loss attributable to a federally declared disaster that takes place in an area that the president declares to be eligible for federal assistance. In other words, the disaster loss has to occur in a county that qualifies for both individual and public assistance (or both).
Disaster losses do not apply only to individual personal-use property but may also be claimed for an individual business or income-producing property partnership as well as by S corporations, and other corporations. Anyone who has suffered a disaster loss is not only eligible to claim a casualty loss deduction but can also decide to claim the loss in the preceding tax year.
Qualified Disaster Losses
This type of disaster loss also includes a person’s casualty and theft loss of personal-use property attributable to:
- A major disaster declared by the US President under the 2016 version of the Stafford Act (section 401)
- The California wildfires in 2017 and January 2018
- Hurricane Maria
- Hurricane Irma
- Hurricane Harvey
- Tropical Storm Harvey
- A major disaster declared by the US president under the Stafford Act (section 401) that took place in 2018 and before 2019 (December 21) and continued up to January 19, 2020 (apart from those attributable to the January 2018 California wildfires that were provided prior relief)
- A major disaster as determined by a US presidential declaration dated between January 1, 2020, and February 25, 2021 (inclusive). However, to be eligible for this expansion, the major disaster’s incident period must be between December 28, 2019, and December 27, 2020 (inclusive). Also, the end of the incident period of the major disaster must not extend beyond January 26, 2021. A qualified disaster excludes all losses attributable to any major disaster declared only because of COVID-19
Casualty and Theft Loss Examples
The following are some instances where casualty losses can result:
- Earthquakes.
- Volcanic eruptions
- Car accidents (has exceptions).
- Fires (has exceptions)
- Mine cave-ins
- Floods
- Terrorism
- Government-approved demolition or relocation of a home deemed unsafe because of a disaster
- Shipwrecks
- Storms such as hurricanes and tornadoes
- Vandalism
- Sonic booms
Some examples of what can constitute theft include:
- Robbery
- Burglary
- Embezzlement
- Blackmail
- Extortion
- Larceny
- Kidnapping for ransom
Taking money or property through misrepresentation or fraud is considered theft if state or local laws explicitly prohibit such.
How to Calculate a Casualty or Theft Loss
You can claim your casualty and theft losses as an itemized deduction on Schedule A of Form 1040 (or Schedule A of Form 1040NR, if you are a nonresident alien).
In the case of personal-use property, USD 100 must be subtracted from each casualty or theft event that took place within the year, after subtracting any salvage value and any insurance or other reimbursement. The next step is to add up all those amounts and then subtract 10 percent of your adjusted gross income (AGI) from that total to calculate your allowable casualty and theft losses for the year.
For example, say there was a theft of a taxpayer’s vehicle, and inside the car was his high-end Android mobile phone. Let’s assume that the fair market value of the vehicle is USD 9,000, the phone is valued at USD 2,100 and his AGI for the year is USD 25,000.
If the deductions are itemized, then the theft victim can deduct any loss amount higher than USD 2,500 (10 percent of his AGI)
Calculating the total loss would proceed as follows:
USD 9,000 + USD 2,100 = USD 6,900 loss
USD 9,000 – USD 100 – USD 100 = USD 8,800 (USD 100 subtractions for the loss of the vehicle and the phone, respectively)
Therefore, the deductible loss to be reported on Schedule A =
USD 8,800 – USD 2,500 = USD 8,300
Note that losses that have received insurance reimbursement are not eligible. Also, claims paid in a later year for losses deducted in a previous year must be recorded as income.
For cases of qualified disaster losses, you can choose to deduct the loss without itemizing your deductions. Your net casualty loss must not have been higher than 10 percent of your AGI to be eligible for the deduction, but you would lower each casualty loss by USD 500 after any salvage value and any other reimbursement.
When to Deduct Casualty or Theft Losses
Casualty losses are deductible in the year the victim suffers the loss. If you have a reasonable chance of recovering the loss through a claim for reimbursement, then it is assumed that you have not suffered any loss. If your casualty loss arises from a federally declared disaster that happened in a location eligible for public or individual assistance (or both), you can decide to treat the casualty loss as having taken place in the year immediately preceding the tax year in which you sustained the disaster loss, and you can deduct the loss on your return or amended return for that preceding tax year.
Theft losses are usually deductible in the year you discover the stealing. If you expect recovery through a claim for reimbursement, then you will also be considered ineligible for deductions until the taxable year in which you can determine with reasonable certainty whether or not you’ll be reimbursed.
Conclusion
The IRS casualty and theft losses provision helps taxpayers recover from several kinds of losses through deductions.
Note that deduction for casualty and theft losses of personal-use property is limited. For tax years 2018 through 2025, the personal casualty and theft losses of an individual are deductible only to the extent they can be attributed to a federally declared disaster.
However, an exception applies if you have recorded personal tax gains for the tax year. If such is the case, it is possible to reduce your personal casualty gains via any casualty losses that cannot be attributed to a federally declared disaster. Any excess gain will be utilized to reduce losses due to a federally declared disaster.
Personal casualty and theft losses attributable to a federally declared disaster are subject to the USD 100 per casualty and 10 percent AGI rules. However, these rules are not applicable to losses on business property or income-producing property. But if your casualty or theft loss involves a home used for business or rented out, the deductible loss may be limited.