Posted by Larry Hurt

Claiming Casualty and Theft Losses on Your Tax Return

Claiming Casualty and Theft Losses on Your Tax Return

No one hopes for property damage, but when it comes, there are tax deductions that take care of it. Cases of a fire accident, natural disaster, etc. have deductions. Itemizing gives you access to this casualty loss deduction. You cannot file and claim the standard deduction and itemize for your losses.

The year 2018 came with some changes in terms of casualty and theft to deduction directed to many things. The Tax Cuts and Jobs Act (TCJA) triggered some changes to this deduction. From 2018, deduction from casualty and theft losses are only allowed if triggered by an event classified as a disaster by the U.S. President.

Explaining Casualty Losses 

A casualty loss involves the loss of property, triggered by a sudden event. This includes damage or destruction to such property. The event must be unexpected, unusual, and identifiable. Events in these criteria before 2018 are:

  • Floods

  • Storms

  • Car accident

  • Hurricanes

  • Shipwrecks

  • Vandalism

  • Fires

  • Volcanic eruption

  • Terrorist attacks

  • Vandalism

For losses that occurred before 2018, they were not tax-deductible, and damage and destruction of the property was due to

  • Pet-related accidents like your dog knocking down a valuable object

  • All arsons that can be traced to the taxpayer

  • Car accidents that can be avoided; caused by the taxpayer.

  • Deterioration

Do thefts Qualify Under the TCJA

According to the IRS, theft is when someone removes something from a property, intending to gain possession of it illegally.

Also, a presidential declared disaster must have triggered the theft to qualify. Victims of blackmail, extortion, embezzlement, kidnapping for ransom, burglary, and robbery can be said to have theft loss in 2017 or earlier.

Lost and Mislaid Property 

It cannot be classified as stolen properties for properties that are lost, which makes them not tax-deductible. This applies both when the TCJA took effect and after. However, in 2017, your property loss due to a sudden or unusual event could have been classified as a casualty loss.

Here is an example from the IRS of an instance of property loss that qualifies as a casualty loss in 2017. You wanted to open the door, and someone unintentionally slams the door. This made your diamond ring fall off and broke. The mishap with the diamond ring will be classified as a casualty loss only in 2017 or earlier.  

Bank Deposit Loss

Losing money in 2017 or earlier could have been a casualty loss or ordinary loss, which might happen when your bank became insolvent. There is an opportunity to claim a casualty loss for people whose deposit was with a bank, credit union, or a loan society (and other federally insured financial firms).

People whose loss is not federally insured have an ordinary loss. Hence, the reporting will be different on the tax return. To claim this, itemizing is necessary but as a miscellaneous item, not a theft or casualty loss.

Calculating Casualty Loss Deduction 

The limit of casualty and theft losses is $100 per loss. To be eligible to take this deduction, the loss must be more than 10% of your adjusted gross income. 

If you have property covered by insurance and the insurance company takes care of the loss, you cannot include it. Whatever the insurance company reimburses you, you should remove it from the loss you want to claim.

The Disaster Tax Relief and Airport and Airway Extension Act

In 2017 and 2018, there was a slight change in this rule for some taxpayers. Victims of Hurricane Maria, Harvey, and Irma had lenient laws regarding the Disaster Tax Relief and Airport and Airway Extension Act of 2017, signed by President Donald Trump in September 2017.

Alongside many other tax breaks, the 10% AGI rule does not apply to these victims. They do not have to itemize to claim such deduction for damages. Victims of the California wildfire also enjoyed these provisions. 

If you are affected by natural disasters, you will enjoy some tax relief from Uncle Sam. For taxpayers in Oregon, Tennessee, and Puerto Rico, they had tax breaks in 2020. With this, be sure to be in touch with your tax pro if anything out of the ordinary happened recently in your area. It could qualify you for relieves.

Larry Hurt
Contact Member