Claiming Casualty and Theft Losses on Your Tax Return
Rules are much more restrictive beginning 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 fire, accident, or a natural disaster. You must itemize to claim this casualty loss deduction, however. You can't claim the standard deduction for your filing status and an itemized deduction for your losses, too, and there are other restrictions as well.
Standard deductions for the 2019 tax year—the return you'll file in 2020—are $24,400 for married taxpayers filing joint returns, $12,200 for single filers, and $18,350 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.
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 brought about due to an event that's been declared a disaster by the U.S. President.
You can still claim these losses on your 2017 tax return without a presidential declaration, however, if you amend the return within three years from the date you filed it.
The TCJA could potentially expire at the end of 2025, so the full scope of this deduction could be reinstated at that time.
Defining Casualty Losses
A casualty is the loss of property, including damage and destruction, that occurs because of a sudden event. The event must be identifiable, unexpected, and unusual. Prior to 2018, events that meet these criteria included:
- Car accidents
- Disaster-related demolition
- Terrorist attacks
- Volcanic eruptions
Non-Deductible Casualty Losses
Losses that occurred prior to 2018 aren't tax-deductible if the damage or destruction of the property was the result of:
- Accidental breaking, such as dinnerware or glassware being dropped and shattering
- Pet-related accidents, such as your cat knocking over a valuable object
- Arson committed by or on behalf of the taxpayer
- Car accidents that are willful or willfully negligent and that are caused by or on behalf of the taxpayer
- Progressive deterioration
Progressive deterioration is damage that occurs steadily over an extended period of time. Damage caused by termite infestation, dry rot, and wet rot are all examples of non-deductible progressive deterioration losses. The damage must have been caused by a sudden event, such as a natural disaster.
It's unlikely that any type of infestation would qualify from 2018 through 2025 while the TCJA is in effect because it wouldn't meet the rule that the U.S. President must declare the situation a disaster.
Do Theft Losses Qualify Under the TCJA?
The IRS defines theft as someone taking or removing property with the intention of depriving the owner of it. The taking must additionally be illegal under state law.
Again, the theft must have occurred due to a presidential disaster area declaration to qualify beginning in 2018, but you might have had a theft loss if you were the victim of blackmail, burglary, embezzlement, extortion, kidnapping for ransom, larceny, or robbery in 2017 or earlier.
As an example, let's say that a hurricane strikes your hometown and the president declares that it's a disaster area. But your vintage car sustains only minimal damage because it was tucked safely away in a sturdy garage. Then a thief gains entrance to your garage through one of the windows broken in the storm and makes off with your car. The theft and the disaster were related so you might make the argument that the theft is deductible while the TCJA is in effect.
Mislaid and Lost Property
Property that's been mislaid or lost is not stolen and is therefore generally not tax-deductible, either before the TCJA took effect or after. Your loss might have qualified as a casualty loss in 2017, however, if you lost property because of a sudden, unexpected, and unusual event.
The IRS provides the following example of lost property that would have qualify as a casualty loss through 2017: You're reaching into your car when someone accidentally slams the door shut on your hand. The setting of your engagement ring is broken. The diamond falls out and straight down into a gutter. The loss of the diamond would be a casualty in this case, but only in 2017 or earlier.
Losses on a Bank Deposit
Your loss might have been either a casualty loss or an ordinary loss if you lost money in 2017 or earlier because your bank became insolvent. You might be able to claim a casualty loss if your deposit was with a bank, a savings and loan association, credit union, or other financial institution that was federally insured.
You have an ordinary loss if your deposit was not federally insured, and this would be reported somewhat differently on your tax return—again, prior to 2018. You would still have to itemize to claim it, but it would be a miscellaneous itemized deduction, not a casualty and theft loss. And the TCJA also eliminates miscellaneous itemized deductions from 2018 through 2025.
The situation must be the result of a disaster declared by the president, so the casualty loss option is no longer available, at least until 2025.
Calculating the Casualty Loss Deduction
Casualty and theft losses are limited to a $100 threshold per loss. This threshold works like a deductible. The loss must additionally exceed 10% of your adjusted gross income (AGI) in order for you to be able to take this deduction.
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 expect to eventually be reimbursed.
A Calculation Example
Let's say that John suffered two losses last year. His uninsured laptop computer was stolen and an earthquake later caused damage to his home. Each event is separately subject to $100 exclusion.
John would have a loss of $1,400 after allowing for the $100 per loss exclusion if his stolen laptop was worth $1,500. He would have a loss of $9,900 if the damage reduced his property's value by $10,000, less 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 is $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 2017 or in earlier years, or for just $6,900—the $9,900 property damage loss less 10% of his AGI—in 2018 or later if the earthquake was declared a national disaster. He could not claim a deduction for the stolen laptop under TCJA rules.
The Disaster Tax Relief and Airport and Airway Extension Act
These rules changed somewhat in 2017 and 2018, at least for some taxpayers. Victims of Hurricanes Harvey, Irma, and Maria were subject to more lenient rules 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.
The IRS typically grants various kinds of tax relief to those affected by natural disasters. Taxpayers in Oregon, Tennessee, and Puerto Rico received tax breaks in 2020, so check with a tax professional if something has recently 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, Casualties and Thefts. You can then enter the resulting number on Schedule A when you itemize, along with all your other itemized deductions. Finally, transfer the number from Schedule A to line 9 of the Form 1040 for the 2019 tax year—the return you would file in 2020.
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2019." Accessed June 18, 2020.
Internal Revenue Service. "2019 Instructions for Form 4684: Casualties and Thefts," Pages 1-2. Accessed June 18, 2020.
Internal Revenue Service. "Topic No. 308 Amended Returns." Accessed June 18, 2020.
Internal Revenue Service. "2019 Publication 547: Casualties, Disasters, and Thefts," Page 3. Accessed June 18, 2020.
Internal Revenue Service. "2019 Publication 547: Casualties, Disasters, and Thefts," Page 5. Accessed June 18, 2020.
Internal Revenue Service. "2017 Publication 547: Casualties, Disasters, and Thefts," Page 4. Accessed June 18, 2020.
Internal Revenue Service. "Topic No. 515 Casualty, Disaster, and Theft Losses." Accessed June 18, 2020.
Internal Revenue Service. "Publication 976 (2018), Disaster Relief." Accessed June 18, 2020.
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