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.
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.
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:
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:
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.
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.
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.
Once you establish that your loss is eligible, you must calculate the deduction amount correctly.
Steps for Personal-Use Property
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.
Steps to calculate the deductible amount:
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.
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.
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.