Losses incurred because of a casualty, disaster, or theft may be tax-deductible. Both casualty and theft losses are reported on Form 4684 and Form 1040 Schedule A. We discuss casualties first, and thefts second.
A casualty is the loss of property (including damage and destruction) because of a sudden event. The event must be identifiable, unexpected, and unusual. Events that meet this criteria include:
- car accidents,
- disaster-related demolition,
- terrorist attacks,
- vandalism, and
- volcanic eruptions.
Non-Deductible Casualty Losses
Losses are not tax-deductible if the damage or destruction of the property is the result of:
- accidental breaking (such as dinnerware or glassware breaking),
- pet-related accidents (such as the cat knocking over a valuable object),
- arson committed by or on behalf of the taxpayer,
- car accidents that are willful or willfully negligent and that are caused by or on behalf of the taxpayer, or
- progressive deterioration.
Progressive deterioration is damage that steadily occurs over a long period of time. Damage caused by termite infestation, dry rot, and wet rot are examples of non-deductible progressive deterioration losses. To be tax-deductible, the damage must be caused by a sudden event (such as a sudden natural disaster or a sudden infestation).
“A theft is the taking and removing of money or property with the intent to deprive the owner of it,” the IRS says. “The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.” (Publication 17, chapter 25.)
You may have a theft loss if you are the victim of
- kidnapping for ransom,
- larceny, or
Mislaid and Lost Property
Property that you have mislaid or lost is not a theft and is generally not tax-deductible. However, if you lost property because of a sudden, unexpected, and unusual event, your loss may qualify as a casualty loss.
The IRS provides the following example of lost property that would qualify as a casualty loss:
“A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond is a casualty.” (Publication 17.)
Losses on a Bank Deposit
If you lost money because your bank became insolvent, your loss may be a casualty loss or an ordinary loss.
If your deposit at the bank, savings & loan, credit union, or other financial institution was a federally insured deposit, then you may claim a casualty loss.
If your deposit was not federally insured, then you have an ordinary loss. Your ordinary loss is reported as a miscellaneous itemized deduction on line 22 of Schedule A.
- If you lent someone money, and they never paid you back, then you have a nonbusiness bad debt. That is tax-deductible as a capital loss.
Calculating the Casualty Loss Deduction
Casualty and theft losses are limited:
- by an $100 threshold per loss event and
- an overall threshold of 10% of your adjusted gross income.
To phrase this another way, your casualty loss is deductible to the extent that it exceeds $100 per loss event, and to the extent that it exceeds 10% of your AGI.
For example, John suffered two losses last year: his uninsured laptop computer was stolen, and later an earthquake caused damage to his home. Each event is subject to a separate $100 limitation. Let’s say his stolen laptop was worth $1,500, then applying the $100 limitation, we have a loss of $1,400. Similarly for the damage to his home. Now, John’s total casualty and theft losses, when added up, are reduced by 10% of his adjusted gross income. Let’s say the damage to his home reduced his property value by $10,000, and John has an adjusted gross income of $30,000.
The calculations would go like this:
- Event 1 Stolen computer ($1,500 – $100) = $1,400
- Event 2 Damaged house ($10,000 – $100) = $9,900
- Total Losses ($1,400 + $9,900) = $11,300
- 10% Threshold ($30,000 AGI x 10%) = $3,000
- Deductible Losses ($11,300 – $3,000) = $8,300
Casualty and theft losses are reported and calculated on Form 4684, Casualties and Thefts.