Going through a natural disaster is never a good thing, but you might be able to deduct the casualty, theft, and disaster losses you incurred on your annual tax return. To claim the deduction, you must meet certain requirements and follow specific rules as per the IRS. Since the process can get confusing, it’s recommended that you work with a tax expert, someone who understands the latest tax laws and their application.
But even before working with a tax professional, it is important to know a few basic things when taking a natural disaster tax deduction. To take the deduction, the losses cannot have been reimbursed entirely by your insurance company, and generally, you must itemize your tax deductions rather than take the standard deduction. You cannot itemize and take the standard deduction in the same tax year on the same tax return.
Because of the different forms and complex processes needed to itemize your tax deductions, it is recommended that you work with a tax professional. You might find it easier to have someone else prepare your taxes this year, especially if you have a loss tax deduction you wish to take on your tax return. At Borshoff Consulting, we specialize in taxes, so we can straighten out your tax situation with ease.
What Do You Need to Know About Casualty and Theft Losses?
Knowing the definitions of terms involved in disaster loss deductions can help you understand the process as you work with a tax professional. Read the following, so you know what to expect as you work on your taxes, and so you can be better prepared if a natural disaster ever strikes your property again–though we hope one never does!
While perhaps a casualty loss is easily explained as a natural disaster, a theft loss is not so easily understood by taxpayers in general.
For tax purposes, theft is actually the act of removing or taking property away from the owner of that property. The intent must be to deprive the person who owns the property of it. This act must be illegal under state law for the state in which the theft occurred.
To complicate things a bit further, the theft must have happened in a disaster area declaration as decided upon by the President of the United States of America.
Also, if the property is lost or mislaid, it is not considered to be stolen. It would not be a tax-deductible loss under these circumstances.
When Can You Deduct a Loss on Your Annual Tax Return?
There are certain circumstances in which lost or mislaid property is considered to be tax-deductible. Since it would depend on the circumstances, it is always advisable that you seek the guidance of a tax consultant when trying to deduct a loss on your tax return.
Nevertheless, if your loss occurred before the Tax Cuts & Jobs Act of 2017, it may be eligible as either an ordinary loss or a casualty loss if the said loss was a loss on a bank deposit. If your deposit was with a savings and loan association, credit union, bank, or federally insured financial institution, you might be able to claim a loss on your tax return.
If the deposit was not federally insured and was an ordinary loss, you would report it differently on your annual tax return. It would be classified as a miscellaneous itemized deduction, not a casualty and theft loss. Also, to take this loss, you would need to itemize your tax deductions.
The reason this is allowed is that, before the Tax Cuts & Jobs Act of 2017, miscellaneous itemized tax deductions were allowed as itemized tax deductions. For the tax years of 2018 through 2025, the act has eliminated miscellaneous itemized tax deductions.
Let’s further explore what you are allowed to deduct on your tax return if you are filing for a tax year that is not a part of the Tax Cuts & Jobs Act of 2017.
What are Casualty and Theft Losses?
According to the IRS, the casualty and theft losses you wish to take as a deduction on your tax return must be caused by a federally declared disaster, as declared by the President of the United States. A federally declared disaster is one that occurs in an area eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
Once you have determined the disaster status, you can start clarifying your losses. The losses that count toward the dedication must be related to your home, the belongings in your home, and/or your vehicles. A casualty loss can occur from the damage and destruction of your property from a sudden or unexpected event, any event beyond human control.
Examples would be a flood, tornado, fire, hurricane, earthquake, volcano, or other unusual events that are considered to be a disaster or an “act of God.” Normal deterioration, such as that which occurs because of normal wear and tear, does not count for this tax deduction.
There are three types of casualty losses: (a) federal casualty losses, (b) disaster losses, and (c) qualified disaster losses. All three types of losses must be federally declared disaster areas, but the specific requirements for each type of casualty loss are different.
With the tax reform that occurred with the Tax Cuts and Jobs Act of 2017, mislaid or lost property does not count for you to deduct the casualty and theft loss deduction. Deductions must follow the rules set forth by the IRS.
Additionally, you cannot deduct any losses covered by your insurance plan unless you file a reimbursement claim and reduce the loss by the amount of reimbursement you received from your insurance company or the amount of the reimbursement you expect to receive from your insurance company.
For more information on the types of casualty losses and the requirements for each one, refer to this IRS documents:
- IRS Publication 547: Casualty, Disasters, and Theft Losses
- IRS Publication 2194: Disaster Resource Guide
- IRS Publication 976: Disaster Relief.
Alternatively, you can read the instructions on IRS Form 4684: Casualties and Thefts. This will be the form you will use to declare your losses. You’ll want to keep a copy of all documentation used for tax purposes.
How to Determine the Amount of Your Casualty Loss
According to the IRS, you must use an adjusted basis to calculate the amount of your casualty loss. If your property is not completely destroyed when you want to take the casualty loss tax deduction, you will take the lesser of the amount of the adjusted basis of your property or the decrease in the fair market value of your belongings as a result of the casualty you experienced.
How to Determine the Amount of Your Theft Loss
According to the IRS, you must have the adjusted basis of your property to determine the amount of your theft loss. A theft only occurs when someone removes your property with the intention of depriving you of it.
Also, this theft must be illegal under your state’s law. “Your state” refers to the state in which the theft occurred, not the state where you will be filing your taxes. The theft also must have occurred because of criminal intent.
To determine the amount of the theft loss, you will need to use the adjusted basis of your property. The use of the adjusted basis is because the fair market value is zero when a theft occurs and cannot be accurately determined.
For losses that occur as the result of a Ponzi scheme, special rules may apply. To learn more about investment schemes, check out IRS Publication 547 or the IRS’s page for Help for Victims of Ponzi Investment Schemes. Alternatively, you can review the instructions for IRS Form 4684: Casualties and Thefts.
How to Count a Capital Gain on Your Tax Return
According to the IRS, if the amount you are reimbursed by your insurance company or other reimbursement source is greater than the cost or adjusted basis of your belongings, you will have a capital gain. You must include capital gains as part of your income on tax documents in most instances.
If you are eligible to postpone the reporting of the capital gain or have a personal casualty capital gain, you might be able to deduct the portion of the personal casualty loss not attributed to a federally declared disaster area as declared by the President of the United States to the extent the loss does not exceed your personal gain. This is often a tricky process, so it is advised you work with a tax accountant who knows what they are doing in this matter.
For more information on capital gains, please refer to IRS Publication 547: Casualties, Disasters, and Thefts.
How to Deduct a Loss on Your Tax Return
According to the IRS, taxpayers can typically claim their casualty and theft losses if they itemize their deductions. You cannot take the standard deduction and also itemize your deductions; you must choose between the two.
If you have decided to itemize all of your tax deductions, you can use Schedule A: Itemized Deductions to report your casualty and theft losses. Use Schedule A with IRS Form 1040 when you file your income tax return.
The IRS states that for property held by you for personal use, you must take off $100 from each loss event that occurred during the year after you’ve subtracted any salvage value and any insurance or other reimbursement. Once you have done that, you can add up all those amounts. Then, you will subtract 10% of your adjusted gross income (AGI) from the total.
That amount is what you would use to calculate your allowable casualty and theft losses for the year. You may additionally be able to deduct your casualty and theft loss without itemizing your deductions.
Your net casualty loss does not need to exceed 10% of your AGI (adjusted gross income) to qualify for this tax deduction, but you would need to reduce each loss by $500 after any salvage value and any reimbursement.
For more information on how to compute your casualty and theft losses, check out Schedule A: Itemized Deductions, as it has the instructions on there. You will report casualty and theft losses on IRS Form 4683: Casualties and Thefts. Section A is for personal property, and Section B is for any business-related property.
For personal property information, see IRS Publication 584: Casualty, Disaster, and Theft Loss Workbook. For business-related property information, refer to IRS Publication 584-B: Business Casualty, Disaster, and Theft Loss Workbook. Be sure to keep these workbooks with your tax paperwork, as they will help you in claiming your losses.
One important note is that your casualty losses must be deducted in the year you sustained the loss, which is usually the same year that the casualty took place. Theft losses are generally deductible in the year you determine the property or belongings were stolen unless you have a reasonable prospect of recovery through a reimbursement claim with your insurance.
If your loss exceeds your income, you may have a net operating loss. Learn more about this specific circumstance in IRS Publication 536: Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
You may be able to take a casualty, theft, and disaster loss tax deduction, if you have been through a disaster declared as such by the President of the United States. There are several restrictions to getting to take this tax deduction, but it would be worth considering if you sustained a serious loss due to a disaster. If you have been through a loss, seriously consider taking this loss.
For more assistance with your annual tax return, you should turn to Indiana’s tax expert, Sherry Borshoff of Borshoff Consulting. We are well-versed in all tax laws and can help you take this tax deduction the right way. If you need help with your business tax return, we can help you there, too. We are fluent in everything regarding taxes.
We also do business consulting, tax audit representations, and much more. Be sure to book a free tax consultation to find out more about how we can best help your business today! You can trust Indiana’s tax expert!