How To Claim Casualty and Theft Losses on Your Tax Return

Property damage is never a good thing, but you can sometimes recover part of your money by taking a tax deduction for casualty, disaster, and theft losses. This type of deduction can cover damage due to a fire, accident, or natural disaster, but you must itemize to claim it.

Learn more about how to claim a tax deduction for your casualty, disaster, and theft losses.

How the Casualty and Theft Losses Deduction Works

You can only deduct casualty and theft losses if they're directly the result of an event that's a federally declared disaster. Only the president of the United States has the power to declare a disaster in most cases. A president will often declare federal disasters for areas that have been heavily impacted by hurricanes, tornadoes, or floods.

There are three types of deductible losses allowed under the umbrella of federally declared disasters:

• Federal casualty loss: Loss of personal use property as the result of a federally declared disaster. The loss has to occur in a state that's received the disaster declaration
• Disaster loss: Loss of personal use or business property because of a federally declared disaster that occurred in a county that's eligible for public or individual assistance, or both
• Qualified disaster loss: Loss of personal use property due to a disaster declared under Section 401 of the Stafford Act, or several specific natural disasters or time periods.

There are a few types of losses that the Internal Revenue Service (IRS) doesn't allow you to deduct. They include money or property you misplaced or can't find, dishes or furniture that broke under normal conditions, property loss due to insects, and a loss in stock value due to illegal misconduct by a company's officers or directors.

How To Calculate Casualty and Theft Losses

There are several steps to calculating a casualty or theft loss:

1. Start with the total loss for each casualty or theft event.
2. Subtract any salvage value.
3. Subtract any insurance or other reimbursements you might receive
4. Subtract $100.
5. Add up the remaining value of each casualty or theft event for the year.
6. Subtract 10% of your adjusted gross income (AGI) from that total.

The final amount is the total casualty and theft loss that you can deduct for the year. You don't have to itemize your deductions if you have a qualified disaster loss, and your net loss doesn't have to be more than 10% of your AGI. But you would then reduce any other casualty loss by $500 instead of $100 if you claim this type of disaster loss.

Imagine that an earthquake causes $15,000 of damage to your home. The earthquake is declared a federal disaster. Your insurance company covers $3,000 of the damages. To calculate what you can claim on your taxes, you would start by subtracting the amount of any insurance or other reimbursements from the total damages, followed by the $100 per loss exclusion:

$15,000 - $3,000 - $100 = $11,900

Your total casualty and theft loss of $11,900 would then be reduced by 10% of your AGI, which happens to be $30,000

$11,900 - ($30,000 x 0.10) = $11,900 - $3,000 = $8,900

The total deduction you could claim would be $8,900.

How To Claim Casualty and Theft Losses

Casualty and theft losses are first reported and calculated on Form 4684. You can then enter the resulting number on Schedule A when you itemize, along with all your other itemized deductions.

Do Theft Losses Qualify for Deductions?

The IRS defines theft as the act of taking or removing property with the intention of depriving the owner of it. The act must also be illegal under state law. But as with the case of a casualty claim, the theft must have occurred due to a presidential disaster area declaration.

Let's say that a hurricane strikes your hometown and the president declares that it's a disaster area. Then a thief gains entrance to your garage through a window that was broken in the storm and steals your car. You could argue the theft was related to the disaster covered by the presidential declaration because the thief would not have been able to gain entry if the window hadn't been broken. Of course, you'd have to prove that the storm broke the window.

Claiming Bank Losses

Some losses on bank deposits can be claimed on your taxes. You might be able to claim a casualty loss if your deposit was with a federally insured financial institution such as a bank, savings and loan association, or a credit union that went insolvent or bankrupt. But the loss must still be due to a federally declared disaster.

Extra Tax Relief for Disaster Victims

The government typically extends extra tax relief for victims of any particularly devastating disasters that occur throughout the tax year. These events are known as "qualified disasters." Residents of certain Alabama counties have been offered tax relief due to the straight-line winds, tornados and severe storms that struck the area on Jan. 12, 2023, including an extension of time to file some 2022 tax returns and to make associated tax payments.

Should You Itemize Your Deductions?

You have to itemize your deductions to claim casualty and theft losses so you'll have to decide if itemizing instead of taking the standard deduction is worth it in your personal situation.

Standard deductions for the 2022 tax year (the return you'll file in 2023) are $25,900 for married taxpayers filing joint returns, $12,950 for single filers, and $19,400 for those who qualify as head of household. The total of all your itemized deductions would have to exceed the amount applicable to your filing status to make itemizing worthwhile. Otherwise, you'd be paying income tax on more income than is necessary.

You probably shouldn't itemize if your total deductions are less than the standard deduction. This means you won't be able to claim the casualty and theft losses deduction. If you have a qualified disaster loss, though, you may be able to deduct it without itemizing.

Frequently Asked Questions (FAQs)