The Internal Revenue Service allows taxpayers to take motor vehicle deductions that result from an unexpected casualty. You can deduct the cost of damage or loss to a car resulting from the event. However, not every property loss resulting from an accident is tax deductible. Taxpayers must become familiar with the deduction's requirements before preparing a tax return.
Although not all property loss occurring as the result of an accident is tax deductible, certain deductions may be available if the vehicle is totaled.
Casualty Loss Deductions
The IRS allows taxpayers to deduct the loss of a motor vehicle resulting from a casualty. A casualty is damage, destruction or loss of property that results from a sudden, unexpected or unusual event. These are infrequent events that occur swiftly and without notice. Common casualties that adversely affect motor vehicles are accidents, fires, vandalism and earthquakes. However, the damage or loss of a motor vehicle is not deductible if you are willfully negligent in causing the accident. For example, if you drive under the influence of alcohol and crash the vehicle, you cannot take a casualty loss deduction.
You are required to prove to the IRS that the loss is the direct result of a casualty. You must submit documentation to the IRS that supports the amount you are deducting on a tax return and provide proof of ownership. The deduction is reduced by the amount of reimbursement you receive from an insurance company or third party.
Calculating Motor Vehicle Deductions
The IRS disallows a deduction amount that includes the inherent gain of the vehicle. The deduction is limited to the lower of the vehicle's cost basis or the difference between the value immediately before and after the casualty. For example, if you purchase a car valued at $20,000 and you experience a car accident the next day that requires $5,000 of repairs to restore it to the original condition, the casualty loss is limited to the decrease in market value of $5,000. However, if after the initial purchase you made improvements to the car, those costs are included in the cost basis. If the car is completely totaled, the calculated loss equals the $20,000 cost basis.
The IRS requires taxpayers to reduce the total loss resulting from each separate casualty event by $100. After applying the reduction to each casualty event that occurs during the tax year, the total is further reduced by an amount equal to 10 percent of adjusted gross income. For example, the $5,000 of calculated loss is reduced to $4,900. If you have adjusted gross income of $20,000, the deductible loss you can report on a tax return is $2,900.
Casualty Loss Deductions 2018
Deduct your casualty loss in the tax year it was sustained. This is normally the year it occurred. Your loss won't be allowed if you have a reasonable claim for having the cost of your car reimbursed to you by your insurance company.
Income Tax Rules 2017
You will have a net operating loss if total deductions for the year exceed total income. If the casualty deduction creates a net operating loss, you can use the excess loss to reduce income in other tax years. You are required to use as much of the loss as possible in the most recent two tax years immediately preceding the current tax year. If a net operating loss still remains, you can carry it forward for 20 years until it is used.
- IRS.gov: Publication 547: Casualties, Disasters, and Thefts
- IRS.gov: Publication 551: Basis of Assets
- IRS.gov Publication 536: Net Operating Losses for Individuals, Estates, and Trusts
- IRS.gov Topic Number 515 - Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas)
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Nov. 6, 2020.
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021." Accessed Nov. 6, 2020.
- Internal Revenue Service. "2019 Instructions for Form 4684: Casualties and Thefts," Page 1. Accessed Nov. 6, 2020.
- Internal Revenue Service. "2017 Publication 547: Casualties, Disasters, and Thefts," Page 4. Accessed Nov. 6, 2020.
- Internal Revenue Service. "Tax Reform Affects If and How Taxpayers Itemize Their Deductions." Accessed Nov. 6, 2020.
- Internal Revenue Service. "Topic No. 515 Casualty, Disaster, and Theft Losses." Accessed Nov. 6, 2020.
- Congress. "H.R.3823 - Disaster Tax Relief and Airport and Airway Extension Act of 2017." Accessed Nov. 6, 2020.
- Congress. "H.R.1892 - Bipartisan Budget Act of 2018." Accessed Nov. 6, 2020.
- Internal Revenue Service. "Tax Relief in Disaster Situations," Select "Recent Tax Relief: 2020." Accessed Nov. 6, 2020.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.