Claiming Casualty and Theft Losses on Your Tax Return
The Rules Became More Restrictive Starting in 2018
Property damage is never a good thing, but you can take a tax deduction in some cases for damage and losses due to a fire, accident, or natural disaster. However, you must itemize to claim this casualty loss deduction. You can't claim the standard deduction for your filing status and then take an itemized deduction for your losses—and there are other restrictions, as well.
Standard deductions for the 2020 tax year—the return you'll file in 2021—are $24,800 for married taxpayers filing joint returns, $12,400 for single filers, and $18,650 for those who qualify as head of household. The total of all your itemized deductions would have to exceed the amount applicable to your filing status to make itemizing worthwhile. Those figures increase to $25,100, $12,550, and $18,800 in tax year 2021.
There Were Big Changes in 2018
The casualty and theft loss deduction used to cover a pretty wide-ranging set of circumstances, but that changed when the Tax Cuts and Jobs Act (TCJA) went into effect. Beginning in tax year 2018, you can only deduct casualty and theft losses if they're directly tied to an event that's been declared a disaster by the U.S. President.
The TCJA could potentially expire at the end of 2025, so the full scope of this deduction could be reinstated at that time.
Do Theft Losses Qualify Under the TCJA?
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. However, as in the case of a casualty claim, the theft must have occurred due to a presidential disaster area declaration to qualify.
As an example, let's say that a hurricane strikes your hometown and the president declares that it's a disaster area. Then, a thief gains entrance to your garage through a window that was broken in the storm and steals your car. The theft was related to the disaster covered by the presidential declaration, so you might make the argument that the theft is deductible under TCJA law.
Mislaid and Lost Property
Property that's merely been mislaid or lost is not stolen and is therefore generally not tax-deductible, either before the TCJA took effect or after. There were certain conditions, prior to 2018, when a loss may have qualified as a casualty loss if it were related to a sudden, unexpected, and unusual event.
Losses on a Bank Deposit
Depending on the circumstances, your loss might have been either a casualty loss or an ordinary loss if you lost money prior to TCJA reforms. You might be able to claim a casualty loss if your deposit were with a bank, savings and loan association, credit union, or other federally insured financial institution.
You have an ordinary loss if your deposit was not federally insured, and this would be reported somewhat differently on your tax return. You would still have to itemize to claim it, but it would be a miscellaneous itemized deduction, not a casualty and theft loss. The TCJA eliminates miscellaneous itemized deductions from 2018 through 2025.
Calculating the Casualty Loss Deduction
You must deduct $100 from each loss covered by casualty and theft loss deductions. Once you've added up the total deduction for all your losses, you must subtract 10% of your adjusted gross income (AGI) from that total.
Losses do not include any property that's covered by insurance if the insurance company reimburses you for the loss. You must reduce the loss by the amount you were reimbursed (or the amount you expect to be reimbursed).
A Calculation Example
Let's say that John suffered two losses in a year before TCJA changes took effect. His uninsured laptop computer was stolen, and an earthquake later caused damage to his home. Each event is separately subject to a $100 exclusion.
If the laptop had been worth $1,500, then John would have a loss of $1,400 after allowing for the $100 per-loss exclusion. He would have a loss of $9,900 if the damage reduced his property's value by $10,000. (Again, this accounts for the $100 exclusion.)
John's total casualty and theft loss—$11,300, or $1,400 plus $9,900—is then reduced by 10% of his AGI. The calculations would go like this if John's AGI were $30,000.
- Event 1: Stolen computer ($1,500 - $100) = $1,400
- Event 2: Damaged house ($10,000 - $100) = $9,900
- Total losses ($1,400 + $9,900) = $11,300
- 10% AGI threshold ($30,000 AGI x 10%) = $3,000
- Deductible losses ($11,300 - $3,000) = $8,300
John could claim an itemized deduction for $8,300—prior to TCJA change.
In years after TCJA rules took effect, John's deductible loss would be limited to $6,900—the $9,900 property damage loss minus 10% of his AGI. He could not claim a deduction for the stolen laptop under TCJA rules.
Extra Tax Relief for Disaster Victims
The government typically extends extra tax relief for victims of any particularly devastating disasters that occur throughout the year.
In 2017, for example, victims of hurricanes Harvey, Irma, and Maria received tax leniency under the terms of the Disaster Tax Relief and Airport and Airway Extension Act of 2017, signed by President Donald Trump in September 2017. In addition to several other tax breaks, these victims could disregard the 10% of AGI rule, and they could claim a deduction for damages without having to itemize.
The Bipartisan Budget Act of 2018 further extended these provisions to victims of the California wildfires if they suffered damages or losses from October 8 through December 31, 2017.
Some taxpayers in Oregon, Tennessee, and Puerto Rico received tax breaks in 2020. Check with a tax professional if a disaster has occurred in your area to find out what relief you might qualify for.
How to Claim Casualty Losses
Casualty and theft losses are first reported and calculated on Form 4684. You can then enter the resulting number on Schedule A when you itemize, along with all your other itemized deductions.