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.