Claiming A Tax Deduction For A Casualty Or Theft Loss

Individuals must sometimes deal with the aftermath of a sudden casualty or theft loss. If insurance does not cover the incident, the individual usually absorbs the financial cost. Tax filers may claim a deduction on their tax return for a portion of a casualty or theft loss.

A casualty loss is the partial or total destruction of property due to an unexpected event. To be a casualty loss, the damage must be sudden and not be a result of gradual wear and tear. Some examples of casualty losses include the following:

• Destruction due to severe weather
• Sudden damage caused by an unforeseen accident
• Fire damage
• Loss from theft or vandalism

A key feature of a casualty loss is that it occurs unexpectedly. A roof damaged by a tornado is a casualty loss, but the routine weathering of roof shingles is not a qualifying loss. Structural damage caused by termites is not a casualty loss since it is not a sudden occurrence.

Net financial loss

If insurance is received to cover a portion of the loss, the total loss must be reduced by the amount of insurance proceeds to arrive at your net financial loss. Only a portion of a casualty loss is deductible, and the net amount of your financial loss serves as the starting point for calculating the deductible amount.

Deductible portion

The amount of your net financial loss must be reduced by the following steps to determine how much is actually deductible as a casualty loss:

1. The net financial loss is first reduced by $100
2. After the $100 reduction, the result is reduced by 10 percent of your income
3. The remaining portion is deductible

If the financial cost of a casualty or theft is less than 10 percent of your income, there may be little or no deductible loss. The $100 reduction applies to all losses incurred in a single casualty incident, such as a single wind storm.

Disaster area exception

There is a special exception for tax filers affected by events in a federally declared disaster area. Instead of waiting to file their next tax return, individuals in disaster areas can claim the loss immediately. Tax filers in a disaster area may choose to amend their previous tax return to receive a quick refund, rather than including the deduction on the tax return for the year in which the loss occurred.

A casualty loss or theft loss is reported on IRS Form 4684, which is a supporting form for IRS Schedule A. Casualty losses and all other itemized deductions are summarized on Schedule A, which is a supporting form for Form 1040. Contact a tax service, like Capital Accounting And Tax Service Inc, for more assistance in federal income tax preparation.