Claiming Casualty and Theft Losses on Your Tax Return
The rules change in 2018, becoming much more restrictive
More than 72,000 taxpayers claimed casualty and theft losses on their 2015 tax returns. So what are these losses and how do they work to reduce your taxes?
They contribute to a tax deduction you can take for theft and property damage due to fire, accident, or a natural disaster. Of course, there are rules. First, you must itemize to claim this deduction rather than use the standard deduction for your filing status. There are a few other requirements as well.
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. Events that meet these criteria include:
- Car accidents
- Disaster-related demolition
- Terrorist attacks
- Volcanic eruptions
This used to be a pretty wide-ranging set of circumstances, but that changed with the passage of the Tax Cuts and Jobs Act in December 2017. Beginning with tax year 2018 and through tax year 2025, you can only claim casualties such as these if they come about due to an event that's been declared a disaster by the U.S. President. But you can still claim these losses on your 2017 tax return—the one you'll file in April 2018—even without a presidential declaration.
Non-Deductible Casualty Losses
Losses aren't tax-deductible if the damage or destruction of the property is 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 steadily occurs 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 be caused by a sudden event, such as a sudden natural disaster, and it's unlikely that any type of infestation would qualify going forward from 2018 through 2025 because it probably wouldn't meet the rule that the U.S. President must declare the situation a disaster.
The IRS defines a theft as "the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.”
Again, beginning in 2018, the theft must have occurred due to a presidential disaster area declaration. But you might have a theft loss if you were the victim of any of the following during the 2017 tax year:
- Kidnapping for ransom
Mislaid and Lost Property
Property that's been mislaid or lost is not a theft and is generally not tax-deductible. If you lost property because of a sudden, unexpected, and unusual event, however, your loss might qualify as a casualty loss.
The IRS provides the following example of lost property that would qualify as a casualty loss: "A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond is a casualty."
Losses on a Bank Deposit
If you lost money because your bank became insolvent, your loss might be either a casualty loss or an ordinary loss. You might be able to claim a casualty loss if your deposit was with a bank, savings and loan association, credit union, or other financial institution that was a federally insured.
If your deposit was not federally insured, you have an ordinary loss 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 on line 28 of Schedule A rather than on line 22.
Calculating the Casualty Loss Deduction
Casualty and theft losses are limited to a $100 threshold per loss event and an overall threshold of 10 percent of your adjusted gross income. They do not include any property that is covered by insurance if the insurance company reimburses you for the loss.
Let's say that John suffered two losses last year: his uninsured laptop computer was stolen and later an earthquake caused damage to his home. Each event is subject to a separate $100 limitation. If his stolen laptop was worth $1,500, we would have a loss of $1,400 after allowing for the $100 per loss threshold.
The same would apply to the damage to his home. John's total casualty and theft losses are then reduced by 10 percent of his adjusted gross income after they're added together. Let's say the damage to his home reduced his property value by $10,000 and John has an adjusted gross income of $30,000. The calculations would go like this:
- 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 Percent AGI Threshold ($30,000 AGI x 10 percent) = $3,000
- Deductible Losses ($11,300 - $3,000) = $8,300
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 this and all your other deductions, then transfer the number from Schedule A to line 40 of Form 1040.