Unexpected property losses can happen to anyone, at any time. Although taxes probably don't immediately come to mind when you suffer a loss, the IRS can provide some assistance. It deems thefts, car accidents, natural disasters and other losses "theft and casualty losses" and you can usually deduct them on your federal income tax return. This can include deductions for the loss of your home, household items, and vehicles.
You can only deduct these losses, however, if your insurance didn't cover them first. In addition, you can't deduct for losses caused by things like progressive deterioration of your home from weather, insects, or wood rot. The IRS uses the words "sudden, unexpected, and unusual" to describe casualty losses for a reason.
The IRS requires proof of your loss and provides detailed formulas for you to calculate your losses to figure out your deductions on your taxes. Additionally, the process for claiming casualty losses for personal property differs from the process for claiming casualty losses for federal disasters.
Keep reading to find out how to prove and claim a casualty loss deduction.
Proving Your Casualty Loss Deduction
If a sudden, unexpected, or unusual event damages your property, you may be eligible to claim a casualty deduction for that loss during that tax year. This loss is typically caused by an event that was not your fault -- meaning you can't claim a deduction for items you misplaced or broke, for example.
The first thing you need to do is prove to the IRS you're the owner of the property. Additionally, if you receive -- or anticipate receiving -- any insurance reimbursement or lawsuit settlement regarding your losses, you must notify the IRS. Casualty loss deductions are for unrecoverable losses only. If your insurance fully covers your losses, you're not eligible for a casualty loss deduction.
If you lost property due to theft, you must be prepared to show the IRS a police report documenting the theft. If you lost property due to a weather event or fire, be sure to record all of the details. Photos of the destruction and damage are helpful, if you can provide them.
Holding on to your records and receipts -- and making sure that they're organized -- is a good way to prove your property ownership. Keep the following things whenever you purchase or improve a big ticket item, and you won't be struggling to prove ownership when tax time comes:
- Paperwork showing you owned the property damaged, stolen or destroyed
- Receipts showing both the original cost of the item and any improvements you have made to the property
- Proof of the property's current and fair market value, such as appraisals or current insurance statements
These records can all save time and make things easier in the event of any loss whether you claim a casualty loss deduction or not, and help if you have any issues with the IRS.
Keep reading to learn how to claim a personal casualty loss deduction.
Claiming a Personal Casualty Loss Deduction
For personal casualty losses -- thefts or casualties to non-business property -- you use IRS Form 4684, Section A. The form has a separate column for each item lost. First, you need to calculate the amount of your losses and then subtract any reimbursements you had, such as insurance payouts. Then, according to IRS rules, you must subtract $100 for each casualty, theft, or accident you suffered on your property throughout the year, no matter how many items were damaged or destroyed. Note that this is if you are married and filing jointly; if you file separately from your spouse, you must subtract that $100 individually.
In addition to Form 4684, you must reduce your deductible loss by 10 percent of your adjustable gross income on line 37 of Form 1040. Sometimes this means that if you only had a small loss, you're unlikely to gain any tax benefits.
Here's an example. In 2014, you're involved in an accident that's not your fault and your car -- purchased new in 2012 for $30,000 -- is totaled. On the day of accident, the fair market value of your car was $20,000 due to depreciation. This means that the value of the loss is $20,000. However, if you a salvage yard would buy your totaled car for $1,000, then your loss drops to $19,000. The $19,000 would be your casualty loss. If your adjusted gross income for that year was $60,000, then you can deduct the portion of your loss greater than $6,000 (10 percent x $60,000=$6,000). Since your casualty loss is $19,000, then you can deduct $12,900 ($19,000-$6,000-$100=$12,900) [source: Fishman].
If your losses were so large that they exceeded your entire income for the year -- such as in the case of a home loss -- you've suffered a net operating loss (NOL) for the year. Calculating an NOL is extremely complex, and we recommend working with a tax professional to adjust your tax return.
Claiming casualty loss deductions works a little differently during a federal disaster -- we'll explore those next.
Casualty Losses During a Federal Disaster
Normal casualty losses are typically reported in the tax year they occurred. However, if you have a casualty loss from a federally declared disaster, you can deduct those losses on your return from the past year -- which can get you your much-needed money sooner. This is called amended filing, and makes you eligible for an immediate tax refund to assist you with living and rebuilding expenses. Use Form 1040X for an amended return.
Once an American president declares that an area is a federal disaster -- usually after a major weather event -- the Federal Emergency Management Agency (FEMA) opens up a path for federal assistance, including tax help. Tax relief from disaster loss covers:
- Extended filing deadlines
- Reduction or elimination of penalties for late filing
- Persons whose tax records were destroyed in an affected location
- Workers helping out in disaster areas
The process for calculating your casualty loss is similar to the way you would file a regular casualty loss, except that you can file immediately in the case of a federal disaster. Unfortunately, the IRS doesn't provide deductions for missed or lost wages. Expenses for repairs should take care of the damage only, and can't be used to improve on the state of your home or property.
The IRS doesn't require you to submit documentation with your tax return, but it's always a good idea to keep records because any claims of casualty losses can trigger an audit by the IRS [source: Fishman]. Save important paperwork, such as photographs, the date of the casualty, receipts, copies of any checks written, and proof that you were either the owner or responsible for the property.
And even if your home only suffers minor damage, but later the government decides your home must be torn down, you still may claim a casualty loss as long as it happens within 120 days of the disaster [source: Bell].
For more about taxes and deducting losses, check out the links on the next page.
- Bell, Kay. "Unexpected government help for disaster victims." Bankrate. Feb. 6, 2008. (Oct. 7, 2014) http://www.bankrate.com/brm/itax/edit/tips/stories/casualty_losses2a.asp
- Business Owner's Toolkit. "Casualty Loss Rules Differ for Personal and Business Property." Feb. 10, 2014. (Oct. 7, 2014) http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/casualty-loss-rules-differ-for-personal-business.aspx
- Fishman, Stephen, J.D. "Deducting Casualty and Theft Losses." 2014. (Oct.7, 2014) http://www.nolo.com/legal-encyclopedia/deducting-casualty-theft-losses.html
- IRS. "Form 4684, Casualties and Thefts." Dec. 26, 2013. (Oct. 7, 2014) http://www.irs.gov/uac/Form-4684,-Casualties-and-Thefts
- TurboTax. "About Casualty Deduction for Federal Income Tax." Intuit. 2014. (Oct. 7, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Deductions-and-Credits/About-Casualty-Deduction-for-Federal-Income-Tax/INF14772.html
- Whipple, Gerry. "Ten Tips for Deducting Casualty and Theft Losses." Henry and Horne, LLP. Apr, 14, 2010. (Oct. 7, 2014) http://www.hhcpa.com/blogs/income-tax-accountants-cpa/ten-tips-for-deducting-casualty-and-thefy-losses