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

Casualty, Disaster & Theft Loss on Your Federal Return: Definition & Deductions
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You could end up with losses that your insurance may not fully cover when your property is damaged by a natural disaster like a hurricane or tornado. You might also face issues resulting from a house fire, vandalism or accident. These damages could extend to your vehicles and other personal property.

The Internal Revenue Code provides an itemized deduction for casualty, disaster and theft losses, but the Tax Cuts and Jobs Act has reduced eligibility to only events that occur in a federally-declared disaster area. The law remains in place through ​2025​ when it expires, and it's possible that Congress could renew some or all of the legislation at that time.

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 that occur due to a casualty, disaster or theft, but they all deal with your vehicles, home and household possessions (including cash on hand) being impacted by the incident.

The IRS considers a casualty loss as one that comes from an unexpected event such as a natural disaster rather than typical deterioration over time. It considers a disaster loss to be one stemming specifically from a presidentially-declared national disaster. It considers a theft loss as a criminal intentionally taking property from the owner.

The IRS requires that you first submit a claim to your insurance provider or tap into 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. You won't get a tax benefit for the whole amount. And the IRS has special rules for calculating the loss and determining what's deductible.

Effect of the Tax Cuts and Jobs Act

Along with making the standard deduction bigger and eliminating personal exemptions, the TCJA suspended certain tax deductions or changed the rules on claiming them.

You could claim a tax deduction – your taxable income would be reduced by the allowed amount – simply because your home got damaged by a bad storm up until the TCJA went into effect in 2018, or because 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.

You must have incurred a casualty loss due to a natural disaster such as a hurricane, flood, wildfire or tornado for tax years 2018 through 2025. The U.S. president must have issued a formal disaster declaration for the event. This can be 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.

Checking for Federal Declared Disasters

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

A few of the many federally declared disasters for the 2021 tax year include:

  • Colorado wildfires and straight-line winds
  • Arkansas severe storms and tornadoes
  • Alabama severe storms and flooding
  • Tennessee severe storms, straight-line winds and tornado
  • Illinois severe storms, straight-line winds and tornadoes
  • Kentucky severe storms, straight-line winds, flooding and tornadoes
  • Connecticut remnants of Hurricane Ida
  • Delaware remnants of Hurricane Ida
  • New York remnants of Tropical Storm Fred
  • New Hampshire severe storm and flooding
  • Louisiana tropical storm Nicholas
  • Pennsylvania remnants of Hurricane Ida
  • North Carolina remnants of Tropical Storm Fred

This list by no means lists every qualifying event. In fact, it covers only some of the more notable weather incidents that occurred in the fall and winter of 2021. Always check with the FEMA website to find out if your event is listed.

Make note of the FEMA code. It appears in parentheses beside the disaster name on the list. You'll need this when you report your casualty, disaster and theft losses on your tax return.

Requirements for Deducting Losses

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

Along with making you account for such recovery funds and deducting a small amount, the IRS also places rules based on your adjusted gross income and the value of the property impacted. The loss must be ​more than 10 percent​ of your adjusted gross income to qualify. You can deduct the balance that goes beyond 10 percent of your AGI.

You may have to either determine the lower fair market value after the disaster or calculate an adjusted cost basis for determining your actual loss, depending on whether you've experienced partial or full destruction of your property.

You must deduct the loss in the tax year when it happened. This means that the disaster loss occurred in 2021 for the tax return you're filing in 2022. You can file an amended return for the previous 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. The IRS provides Publication 584 (Casualty, Disaster and Theft Loss Workbook) because this can get tricky. The publication includes some tables you can fill out to list information for each loss and go through a series of calculations to get a total value.

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. There are calculations that involve determining whether the original cost or lowered fair market value is smaller for each item. Take the smaller number and subtract the insurance proceeds. You end up with a gain for which you must account if you were reimbursed for more than the loss.

There's also a worksheet that helps you determine your home's cost basis or adjusted basis. You must complete this when your home itself faced damage or destruction. This involves starting with the home's purchase price, subtracting seller-paid points 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

You must subtract ​$100​ from the final amount and check whether your losses meet the ​10 percent​ AGI threshold when you total up your losses after reimbursements. Whatever remains after that subtraction would be your deductible casualty loss.

You should also check whether it's worth taking the deduction, especially given the reduction required for AGI. You might find that you can only deduct a loss of a few thousand dollars if you continue with itemized deductions. That would be less beneficial than claiming a standard deduction. These deductions are ​$12,550​ for single taxpayers, ​$25,100​ for those who are married and file joint returns, and ​$18,800​ for taxpayers who qualify as head of household as of tax year 2021. You're paying tax to the IRS on more income than you have to if all your itemized deductions don't exceed the applicable amount for your filing status.

Meet with a tax professional who can help you discover any other itemized deductions you might qualify for and who can help you make the best decision. Other available deductions include charity gifts, mortgage interest, taxes and medical expenses. These other itemized deductions have their own rules and limits, so it can definitely be worth it to consult with a professional.

Filling Out Form 4684

You must fill out Form 4684 (Casualties and Thefts) if you've decided to move forward with deducting casualty losses and you qualify to do so. You can consult the form's instructions for more details on each line item.

Enter the information in Section A, which covers personal use property. You can report up to four properties impacted by the incident, such as your home and car. You'll then report the result on Schedule A, which calculates all your itemized deductions, and transfer that total to your Form 1040 tax return.

Make sure you have written proof of the property values, losses and reimbursements to provide accurate information. And while working on Form 4684,

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 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

You can simply write your standard deduction amount on your 2021 Form 1040 tax return on ​line 12a​ if it appears that your casualty loss deduction along with other itemized expenses won't exceed your standard deduction. Otherwise, enter the total of your itemized deductions from Schedule A.