Disaster, Casualty, and Theft Loss
Daily news reports show us that disasters – small and large – can affect anyone. We’ve all seen the hurricanes, tornadoes, earthquakes, mudslides, even volcanoes. If it happens to you, can you get any kind of break when you file your taxes? The short answer: It depends on whether it’s a disaster or another kind of loss.
If you live in an area that the President has declared a federal disaster area, there are several things to consider when filing your return. Otherwise, you can claim a casualty loss – a loss of property not in a declared disaster area. Casualty losses are things that happen unexpectedly and not gradually over time. There's also a provision to claim a theft loss. There are different requirements for claiming each of these losses.
Let’s start with disaster losses.
This type of loss is for the headline-making events, like hurricanes, tornadoes and other kinds of natural disasters. Living in an officially declared federal disaster area may make you eligible for certain tax advantages. If the disaster is bad enough, you may receive federal assistance with housing and cost of living expenses. Payments received from the federal government are nontaxable income. These payments can be used for medical, dental, housing, transportation, personal property, or funeral expenses.
Any loss you suffer can be deducted for the current year or, if it’s for a prior year, you can amend that year’s return. You may also be eligible to file for an extension to file and pay taxes if you live in a declared disaster area. Another benefit is that the IRS will also decrease interest on due taxes during the extension.
Note: Unemployment assistance payments received while also receiving disaster relief are considered taxable income.
A casualty loss is the damage, destruction, or loss of property (including rental property) resulting from a sudden, unexpected, or unusual event. Gradual or progressive damage or destruction doesn’t qualify. You can deduct a casualty loss if the damage is the result of one of:
- Car accidents
- Unsafe home due to disaster
- Hurricane or tornado
The owner of the property may claim a deduction for a casualty loss. If jointly owned, the owners divided the loss equally. If married filing separately, each owner deducts his or her share of the loss.
Typically, you deduct the loss for the year the loss occurred. If you are expecting reimbursements from an insurance claim, you must subtract the reimbursement from the loss total, and claim only the remaining unreimbursed amount. If you are expecting a reimbursement covering all losses, then you can’t deduct any loss.
But: If you don’t claim a deduction because you expect a future reimbursement and then don’t receive the expected amount, you may still claim the deduction for another tax year – the year of no reasonable prospect of reimbursement.
If you are the victim of theft, you're eligible to claim a deduction on your tax return. What counts as theft? If your property was taken illegally, as defined by state law, by:
- Kidnapping for ransom
In addition, you can deduct losses from a Ponzi scheme or similar fraud.
If you’re being reimbursed for your theft loss – from insurance, for example – you must subtract the expected reimbursement from the total amount of the loss. The difference from the reimbursement and loss is the amount of the deduction allowed. If you’re required to pay a legal fee to recover stolen property, you deduct the legal fee as part of the theft loss.
Important: If you suspect theft, it’s a good idea to document your loss by getting eyewitness statements or filing a police report.
Claiming a Loss
Casualty and theft losses can only be deducted if you itemize.
Use the Form 4684 screen on your 1040.com return to report property casualties and thefts. If the property that sustained a loss was insured, you must file a claim for insurance reimbursement before deducting the loss on your return. For unreimbursed losses of personal property, you can only deduct the amount of loss in excess of $100 for each incident, and 10 percent of your adjusted gross income for all losses.
Also see Keeping Records for Home Tax Breaks