Learn more about how to claim a deduction for casualty, disaster, and theft losses.
How the Casualty and Theft Losses Deduction Works
You can only deduct casualty and theft losses if they’re directly tied to an event that’s a federally-declared disaster. Generally speaking, only the president of the United States has the power to declare a disaster. Often, a president will declare federal disasters for areas heavily impacted by hurricanes, tornadoes, or floods. There are three types of deductible losses allowed under the umbrella of “federally declared disaster:
Federal casualty loss: Loss of personal-use property as the result of a federally declared disaster. The loss has to occur in a state that’s received the disaster declaration.Disaster loss: Loss of personal-use or business property because of a federally declared disaster, and that occurred in a county that’s eligible for public or individual assistance, or both.Qualified disaster loss: Loss of personal-use property due to a disaster declared under Section 401 of the Stafford Act, or several specific natural disasters or time periods.
That being said, there are a few types of losses the IRS doesn’t allow you to deduct. They include money or property you misplaced or can’t find, dishes or furniture that broke under normal conditions, property loss due to insects, and a loss in stock value due to illegal misconduct by a company’s officers or directors.
How To Calculate Casualty and Theft Losses
There are several steps to calculating a casualty or theft loss. The final amount is the total casualty and theft loss that you can deduct for the year. If you have a qualified disaster loss, you don’t need to itemize, and your net loss doesn’t need to be more than 10% of your AGI. However, if you claim this type of disaster loss, you would then reduce any other casualty loss by $500 instead of $100. For example, imagine an earthquake causes $15,000 of damage to your home. The earthquake is declared a federal disaster. Your insurance company covers $3,000 of the damages. To calculate what you can claim on your taxes, you would start by subtracting the amount of any insurance or other reimbursements from the total damages, followed by the $100 per-loss exclusion. Your total casualty and theft loss of $11,900 would then be reduced by 10% of your AGI, which happens to be $30,000 The total deduction you could claim would be $8,900.
How To Claim Casualty and Theft Losses
Casualty and theft losses are first reported and calculated on Form 4684. You can then enter the resulting number on Schedule A when you itemize, along with all your other itemized deductions.
Do Theft Losses Qualify for Deductions?
The IRS defines theft as the act of taking or removing property with the intention of depriving the owner of it. The act must also be illegal under state law. But as in the case of a casualty claim, the theft must have occurred due to a presidential disaster area declaration to qualify. As an example, let’s say that a hurricane strikes your hometown, and the president declares that it’s a disaster area. Then, a thief gains entrance to your garage through a window that was broken in the storm and steals your car. You could argue the theft was related to the disaster covered by the presidential declaration.
Claiming Bank Losses
Some losses on a bank deposit can be claimed on your taxes. You might be able to claim a casualty loss if your deposit was with a federally insured financial institution such as a bank, savings and loan association, or credit union that went insolvent or bankrupt. However, the loss must still be due to a federally declared disaster.
Extra Tax Relief for Disaster Victims
The government typically extends extra tax relief for victims of any particularly devastating disasters that occur throughout the year. These events are known as “qualified disasters.” For example, in 2017, victims of hurricanes Harvey, Irma, and Maria received tax leniency under the terms of the Disaster Tax Relief and Airport and Airway Extension Act of 2017. In addition to several other tax breaks, these victims could disregard the 10% AGI rule. Additionally, victims could claim a deduction for damages without having to itemize. Check with a tax professional to find out what relief you might qualify for if a disaster has occurred in your area.
Should You Itemize Your Deductions?
Because you have to itemize your deductions to claim casualty and theft losses, you’ll need to decide if itemizing instead of taking the standard deduction is worth it. Standard deductions for the 2022 tax year—the return you’ll file in 2023—are $25,900 for married taxpayers filing joint returns, $12,950 for single filers, and $19,400 for those who qualify as head of household. In general, the total of all your itemized deductions would have to exceed the amount applicable to your filing status to make itemizing worthwhile. If your total deductions are less than the standard deduction, you shouldn’t itemize. This means you won’t be able to claim the casualty and theft losses deduction. If you have a qualified disaster loss, though, you may be able to deduct it without itemizing.
