Natural disasters and theft can result in significant financial losses, and many taxpayers wonder if they can recover some of these losses through their tax returns. The casualty loss deduction allows individuals and businesses to reduce their tax burden by deducting losses from sudden and unforeseen events. However, due to changes introduced by the Tax Cuts and Jobs Act (TCJA) that apply to tax years 2018 through 2025, understanding eligibility criteria and calculation methods is crucial. Here's what you need to know.
Los Angeles County Wildfires
The Southern California firestorms began in January 2025 and were declared a federal disaster by President Biden on January 8, 2025. A homeowner in Los Angeles County could claim casualty losses for fire-damaged property not covered by insurance. Such taxpayers should begin by documenting the loss, filing a timely insurance claim, and calculating the deductible following the IRS's guidelines.
In addition, the IRS and the State of California have offered extended tax deadlines and tax filing relief for those affected.
What Qualifies as a Casualty or Theft Loss?
A casualty loss involves the destruction or damage of personal property due to a sudden, unexpected, or unusual event. Examples include natural disasters such as hurricanes, fires, floods, and earthquakes. On the other hand, a theft loss arises when property is taken illegally with the intent to deprive you of ownership.
Key Criteria for Eligibility
Casualty or theft losses must meet these conditions to qualify for a deduction:
- Unforeseen Event: The loss must arise from a one-time event, such as a natural disaster, theft, or accident where the taxpayer was not at fault. Gradual damage, like erosion, does not qualify.
- Unreimbursed Loss: Only unreimbursed losses are deductible. Amounts covered by insurance or other reimbursement must be excluded from your deduction.
- Restricted to Federally Declared Areas: For tax years 2018–2025 under the TCJA, the deduction applies solely to federally declared disaster areas.
Example: A hurricane classified as a federally declared disaster damages your home, causing $6,000 in damages. If your insurance covers only $3,000, you can claim the remaining $3,000 as a casualty loss deduction. If the same event were not federally declared, you could not deduct unreimbursed costs.
Deductible casualty losses can result from events including:
- Car accidents
- Earthquakes
- Fires
- Floods
- Government-ordered demolition or relocation of a home that is unsafe to use because of disaster
- Mini cave-ins
- Shipwrecks
- Sonic booms
- Storms, including hurricanes and tornadoes
- Terrorist attacks
- Volcanic eruptions
What Constitutes Theft?
Theft losses must involve criminal activity, with examples including:
- Robbery, burglary, or larceny
- Extortion or blackmail
- Fraud, misrepresentation, or embezzlement
Keep in mind that these deductions are only available to property owners. Renters cannot claim loss deductions for the property itself, though they may deduct certain rent expenses under qualifying circumstances.
How to Claim a Casualty Loss on a Tax Return
Claiming a casualty or theft loss requires careful adherence to IRS procedures. The losses are reported on Form 4684 ("Casualties and Thefts"), with individual taxpayers using Section A and businesses filling out Section B. After completing Form 4684, attach it to your Schedule A of Form 1040 for itemized deductions.
Key points to remember:
- To qualify, the loss must exceed the 10% adjusted gross income (AGI) threshold and is also subject to a $100 reduction per event.
- Losses must be itemized to be deductible, although qualified disaster losses are an exception. Taxpayers in federally declared disaster areas can deduct such losses even without itemizing.
- There is no upper-income cap or limit on the size of your deduction. Additionally, if your allowed deduction exceeds your income, the IRS permits you to carry the deduction into future tax years.
You can claim the loss for the year it occurred or the prior year if the disaster was declared federally. This flexibility allows you to maximize your refund.
How to Calculate a Casualty Loss
Once you establish that your loss is eligible, you must calculate the deduction amount correctly.
Steps for Personal-Use Property
- Determine the decrease in the fair market value (FMV) of your property caused by the loss.
- Compare the FMV to the property's adjusted basis (purchase price plus/minus tax adjustments). Use the lesser amount.
- Subtract any salvage value plus any insurance or other reimbursements you received or expect to receive.
Next, apply the following mandatory reductions:
- Deduct $100 for each casualty or theft event.
- Subtract 10% of your AGI from the loss total.
Example Calculation
A taxpayer sustains damage to their home (not completely destroyed) and car in a fire (a federally declared disaster). Their AGI is $375,000.
- Car FMV before the fire is $8,500, reduced by $0.
- Home FMV before the fire is $250,000, now reduced by $40,000
Steps to calculate the deductible amount:
- Combine FMV losses = $8,500 (car) + $40,000 (home) = $48,500.
- Subtract $100 per property = $48,500 - $200 = $48,300.
- Subtract 10% of AGI ($37,500) = $48,300 - $37,500 = $10,800 deductible loss.
For qualified disaster losses, the ten-percent AGI limitation does not apply. However, each casualty loss must still be reduced by $500 after insurance coverage and salvage value are accounted for.
Casualty and Theft Loss Gains
While casualty and theft loss deductions can reduce your tax liability, certain events may lead to taxable gains. When reimbursed by insurance for a loss, you cannot deduct that reimbursed portion as a casualty loss. Reimbursements exceeding the adjusted basis of your property may even be recognized as taxable gains.
However, uninsured or uncovered losses may offset these gains to reduce your taxable liability.
Additionally, if you receive any reimbursement in a later tax year for losses you deducted in a prior year, you must report those payments as income in the year they are received.
Casualty and Theft Loss Gains
Understanding casualty and theft loss deductions can help mitigate the financial impact of unexpected disasters or theft. However, accurately determining eligibility, completing the proper IRS forms, and calculating the deduction can be challenging.
For personalized assistance with casualty loss deductions, including assessing your eligibility and filing your tax return, contact LTax today. Our team of tax experts is ready to guide you through the process and ensure compliance with IRS regulations. Don’t leave potential deductions on the table—call us today at (561) 453-1441.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.