What Are Casualty and Theft Losses?
Casualty and theft losses are deductible losses that arise from the destruction or loss of a taxpayer's personal property. To be deductible, casualty losses must result from a sudden and unforeseen event. Theft losses generally require proof that the property was actually stolen and not just lost or missing.
- Casualty and Theft Loss Deductions are deductions taxpayers take for natural disasters and catastrophic events they can prove are not their fault.
- After the Tax Cuts and Jobs Act of 2017, federal taxpayers can only deduct casualty and theft that are the result of a federal disaster as declared by the President of the United States.
- Some states have decoupled their tax deductions from the federal government and will honor casualty and theft deductions that are not the result of declared federal disasters.
How Casualty and Theft Losses Work
Casualty and theft loss deductions are only allowed for one-off events that are out of the ordinary and not a routine part of everyday life. The event also must be something that a person was not engaged with when it occurred, like an automobile accident. Natural disasters qualify including earthquakes, fires, floods, hurricanes and storms. Even though a loss may have been sustained by a natural cause, a loss cannot be claimed for something that occurred over time. An example of this would be property erosion because the process is gradual.
Taxpayers' ability to claim casualty and theft losses were restricted for federal taxes by the Tax Cuts and Jobs Act of 2017. Some states, like New York, decoupled their deductions from the IRS after 2017, so taxpayers may still be able to deduct casualty and theft losses at the state level in some states.
Only Damages From Federal Disasters Are Valid Claims
The Tax Cuts and Jobs Act of 2017 changed the rule for casualty and theft claims so that only damages incurred during a federally declared natural disaster are valid claims.
Losses are only deductible if they are not covered by insurance. For example, during a storm that is declared a federal disaster by the President of the United States, a tree falls on your house. You get an estimate from a contractor who says repairs will cost $5,000. You file a claim with your insurance company expecting them to cover the entire claim, but the company only pays $3,000 and determines it doesn't owe you the remaining $2,000. The $2,000 personal casualty loss is deductible from your federal taxes as a casualty loss under the new limitations.
However, if the same storm that felled the same tree is not declared a federal disaster emergency by the President of the United States, you will not be able to deduct the $2,000 not paid by your insurance company from your taxes.
The Impact of the Tax Cuts and Jobs Act on Casualty and Theft Losses
According to the IRS's publication 547 "Casualties, Disasters, and Thefts," "Personal casualty and theft losses of an individual sustained in a tax year beginning after 2017 are deductible only to the extent they're attributable to a federally declared disaster." By extension, this means human activities, such as terrorist attacks, theft and vandalism that are not declared federal emergencies by the President are also not covered.
Events listed by the IRS that are deductible if the loss occurred during a declared federal disaster include (in alphabetic order):
- Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster
- Mine cave-ins
- Sonic booms
- Storms, including hurricanes and tornadoes
- Terrorist attacks
- Volcanic eruptions
Take note that this deduction only applies to the owner of the property. For example, if a renter’s home is damaged in a fire caused by a federally declared disaster, the landlord would be able to claim the deduction, not the renter. However, the renter may be able to take a deduction for rent payments, provided the deduction is filed in the same year that the loss occurred.
Damage incurred to property due to sonic booms is deductible if the boom is declared a federal disaster, perhaps caused by low-flying, supersonic enemy warplanes.
Casualty and Theft Loss Gains
Losses that have been reimbursed by insurance are disallowed. Furthermore, reimbursed claims are counted as gains and may be taxed by the IRS.
For example, Mr. and Mrs. Jones own a house, a diamond necklace in the house and a car in an area that has been affected by an earthquake that was declared a federal disaster. During the earthquake, the car, worth $15,000 is swallowed by a fissure that opens in the ground, and the house foundation sustains $30,000 worth of damage. At the same time, a thief takes advantage of the confusion and mayhem during the disaster to steal Mrs. Jones's diamond necklace worth $5,000 from the house.
Mr. and Mrs. Jones have insurance coverage on the house and the car, but not the necklace, and their insurance company honors a claim to replace the car and repair the house for $45,000. That money is counted as a casualty and theft gain, and as such may be taxed. But that gain can be offset by the loss of the $5,000 necklace claimed on their federal taxes.
Also, taxpayers must count claims paid in a later year for losses that were deducted in a previous year as income.
Reporting a Casualty and Theft Loss
Casualty and theft losses are reported under the casualty loss section on Schedule A of Form 1040. They are subject to a 10% adjusted gross income (AGI) threshold limitation, as well as a $100 reduction per loss. The taxpayer must be able to itemize deductions to claim any personal losses.
A potential scenario: A taxpayer's car was stolen, as well as some jewelry that was in the car at the time of the theft. The car's fair market value was $7,500 and the jewelry was worth $1,800. The taxpayer’s AGI for the year was $38,000. Assuming that deductions are itemized, the taxpayer can deduct any loss amount above $3,800 (10% of AGI).
A total loss would be reported as follows:
$7,500 + $1,800 = $9,300 loss
$9,300 - $100 - $100 = $9,100 ($100 reduction for each loss)
$9,100 - $3,800 = $5,300 deductible loss to be reported on Schedule A. Finally, losses that have been reimbursed by insurance are disallowed. Claims that are paid in a later year for losses that were deducted in a previous year must be counted as income.
Real World Examples of Casualty and Theft Loss Deduction Emergencies
During 2019, the Federal Emergency Management Agency (FEMA) declared over 100 federal emergencies for natural disasters in the United States. To find out if you live in an area affected by a declared federal emergency, you can search the DisasterAssistance.gov website.
The IRS also publishes a webpage that lists the areas affected by federal declared emergencies.