Casualty, Disaster & Theft Loss on Your Federal Return: Definition & Deductions

Casualty, Disaster & Theft Loss on Your Federal Return: Definition & Deductions
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Whether your property gets damaged by a natural disaster, like a hurricane or tornado, or you face issues from a house fire, vandalism or accident, you could end up with losses that your insurance may not fully cover. Along with your home, these damages could extend to your vehicles and other personal property.

The IRS allows for an itemized deduction for casualty, disaster and theft loss, but recent tax law changes have reduced eligibility to only certain declared disasters, so this limits what you can deduct. Learn more about how the theft and casualty loss deduction works and how to claim it.

Defining Casualty, Disaster and Theft Losses

The IRS has separate definitions for losses due to a casualty, disaster or theft. However, all of them deal with your vehicles, home and household possessions (including cash on hand) getting impacted by the incident.

For example, the IRS considers a casualty loss as one that came from an unexpected event (such as a natural disaster, accident or terrorist attack) rather than typical deterioration over time, while it considers a disaster loss as one stemming specifically from a presidentially declared national disaster. On the other hand, it considers a theft loss as any loss stemming from a criminal intentionally taking property from the owner.

In the case of any casualty, disaster and theft loss, the IRS requires that you first go through trying to get insurance or other assistance available to cover the incident before you can potentially qualify for a tax deduction. The amount you get from the insurer or assistance provider is subtracted from the total amount of loss, so you don't get a tax benefit for the whole amount. Further, the IRS has special rules for calculating the loss and determining what's deductible based on current tax laws.

Major Tax Changes for Deductions

While your casualty, disaster or theft loss may have qualified for a deduction without issue a few years ago, there's a chance it might not for 2020. This is due to changes with this deduction that came from the Tax Cuts and Jobs Act that was announced in late 2017. Along with making the standard deduction bigger and eliminating personal exemptions, it suspended certain tax deductions or changed the rules on claiming them.

In the 2016 or 2017 tax year, for example, you could get a tax deduction – meaning your taxable income would get lowered by the allowed amount – simply because your home got damaged by a bad storm or a robber broke in and stole your expensive electronics. You could also deduct damages from car accidents or house fires that happened from everyday incidents. There was no requirement to live in a certain place or experience a federally declared event. You just had to itemize, meet certain thresholds and have verifiable documentation of your losses and the event.

To qualify for this deduction for tax years 2018 to 2025, however, you must have incurred a casualty loss due to a natural disaster such as a hurricane, flood, wildfire or tornado. And specifically, the United States president must have issued a formal disaster declaration for the event that you can find on the Federal Emergency Management Agency website. This can be either an emergency declaration that originated from the state governor or a major disaster declaration issued by the president directly. Otherwise, you can't claim the deduction for other events.

Checking for Federal Declared Disasters

To find out if the losses you've experienced from the event qualify under the federally declared disaster requirement, you can use the "Declared Disasters" page on the website for FEMA. This page automatically loads a list of the most recent declared disasters with options to sort through several pages. However, you can save time by using the page's search tools to look up disasters by state, year and incident type and then clicking "Search and Filter Disasters."

As of publication, just a few of the many federally declared disasters for the 2020 tax year include the following:

  • California wildfires
  • Hurricane Delta
  • Hurricane Isaias
  • Oregon wildfires
  • North Dakota flooding in April 2020
  • Hurricane Zeta
  • Hurricane Sally
  • Oregon storms, floods and landslides of February 2020
  • Arkansas and Tennessee tornadoes and straight-line winds of March 2020

When you locate your qualifying disaster, make note of the FEMA code, which is beside the disaster name in the list, as you need this when you report your casualty, disaster and theft losses on your tax return. This should start with "EM" or "DR."

Understanding Requirements for Deducting Losses

If you've experienced a casualty loss from a federally declared natural disaster, keep in mind that you shouldn't expect to deduct the whole amount of the loss. This is especially the case if your insurance company or an organization like FEMA provided you with aid to help with recovery. The IRS also requires a small mandatory deduction of ​$100​ from the loss amount regardless of the size of your disaster, and if you experienced any capital gains from the incident, you have to offset those at the time of deduction.

Along with making you account for such recovery funds and deducting a small amount, the IRS places rules based on your adjusted gross income and the value of the property impacted. The loss will have to be ​more than 10 percent​ of your AGI to qualify, and then that means you can just deduct what goes ​beyond 10 percent​ of your AGI. Depending on whether you've experienced partial or full destruction to your property, you may need to either determine the lower fair market value after the disaster or calculate an adjusted cost basis for determining your actual loss.

Further, you need to deduct the loss in the tax year when it happened. So, for the return you're filing in 2021, the disaster loss would have occurred in 2020. The exception is that you're allowed to file an amended return for the last tax year if you found you qualified for the deduction and didn't claim it.

Determining Your Casualty Loss

Determining your casualty loss usually requires finding documentation, getting appraisals and doing a lot of math. Since it can get tricky, the IRS has provided Publication 584 (Casualty, Disaster and Theft Loss Workbook) that has some tables you can fill out to list information for each loss and go through a series of calculations to get a total value.

In this workbook, there are sheets for common rooms in a house where you can list possessions lost or damaged along with their original cost, insurance reimbursement, any gain and their fair market values before and after the casualty. To get the loss for each specific item, there are calculations that involve determining whether the original cost or lowered fair market value is smaller, take the smaller number and then subtract the insurance proceeds. In the case where you got reimbursed for more than the loss, you end up with a gain for which you need to account.

There's also a worksheet that helps you determine your home's cost basis or adjusted basis, and you need to complete this when your home itself faced damage or destruction. This involves starting with the home's purchase price, subtracting seller-paid points and then adding various items such as survey fees, additions, title insurance, closing costs and special tax assessments. You get to deduct depreciation from the amount to get a final cost at the end.

Deciding to Deduct Casualty Losses

Keep in mind that when you total up your losses after reimbursements, you need to subtract ​$100​ from the final amount and then check whether your losses meet the ​10 percent​ AGI threshold. Whatever remains after that subtraction would be your deductible casualty loss.

Once you've finished the math, you should also check whether it's worth taking the deduction, especially given the reduction required for AGI. You might find that you only could deduct a loss of a few thousand dollars if you continue with itemized deductions. That would be less beneficial than just getting a standard deduction of ​at least $12,400​ for most taxpayers.

Meeting with a tax professional can help you discover other itemized deductions for which you could qualify and help you make the best decision on moving forward.

Filling Out Form 4684

When you've decided to move forward with deducting casualty losses, and you qualify to do so, you need to fill out Form 4684 (Casualties and Thefts) before entering your itemized deductions and reporting everything on your Form 1040. You enter information in Section A, which covers personal use property, and you can report up to four properties impacted by the incident, such as your home and car.

Before starting, make sure you have written proof of the property values, losses and reimbursements to provide accurate information. And while working on Form 4684, you can consult the form's instructions for more details on each line item.

Here's a quick look at what you can expect to report on this form:

  • FEMA disaster declaration number
  • Description of each property including location and acquisition date
  • Cost basis for each property
  • Any recovery payments, such as insurance proceeds alongside any gains resulting from the incident
  • The property's fair market value before and after the disaster

Do the calculations to account for reimbursements and gains, take off the ​$100​ required and then make a final determination based on your AGI and the ​10 percent​ threshold. You get your final amount for the itemized deduction on ​line 18​.

Getting Your Casualty Loss Deduction

If it looks like your casualty loss deduction alongside other itemized expenses won't exceed your standard deduction, you could simply write your standard deduction amount on your Form 1040 ​line 9​ (there's a short list of the current standard deduction amounts there, too) and not need to proceed with the itemizing steps. However, it may be worth tallying those up in either case to make sure you're going with the better option. To do this, locate Schedule A (Itemized Deductions) and fill out all the sections that apply to you.

When you only take the casualty, disaster or theft loss deduction, you can simply go down to ​line 15​ on your Schedule A, put the amount you got on Form 4684 ​line 18​ and then put that amount on ​line 17​ of Schedule A as your total itemized deductions. However, you can also fill out the sections relating to charity gifts, mortgage interest, taxes and medical expenses and tally up all your possible deductions to get a bigger number for ​line 17​. Keep in mind that those other itemized deductions have their own rules and limits, so consult the IRS instructions for Schedule A to learn more.

Once you're through, Form 1040 ​line 9​ is where you put the itemized deductions amount. You can find your AGI on ​line 8b​, and the itemized deductions lead to a lower number on ​line 11b​, your taxable income. Therefore, you can end up saving on federal income taxes when you deduct qualified casualty, disaster and theft losses.