Casualty and Theft Losses: Comprehensive Guide with Modern Examples

Julia Kagan is a seasoned financial and consumer journalist, formerly the senior editor for personal finance at Investopedia.

Understanding Casualty and Theft Losses

Casualty and theft losses refer to deductible losses incurred when a taxpayer’s personal property is damaged, destroyed, or stolen due to sudden, unexpected events, especially those recognized as federally declared disasters.

What Constitutes Casualty and Theft Losses?

These losses are tax deductions available when property is harmed or lost because of sudden incidents such as natural disasters or theft. To qualify, casualty losses must be caused by unforeseen events, while theft losses require evidence that the property was stolen rather than simply misplaced.

Key Points to Remember

• Casualty and theft loss deductions apply primarily to damages from natural disasters or catastrophic events beyond the taxpayer's control.
• Since the Tax Cuts and Jobs Act of 2017, only losses from federally declared disasters, as announced by the U.S. President, are deductible on federal returns.
• Some states have chosen to maintain broader deduction rules, allowing claims for losses not federally declared.

How Do Casualty and Theft Loss Deductions Operate?

These deductions are reserved for extraordinary, non-recurring events that disrupt normal life, such as earthquakes, floods, hurricanes, and fires. Gradual damages like property erosion do not qualify. The deduction is limited to losses that are not reimbursed by insurance.

While the federal tax code restricts these deductions to federally declared disasters, certain states like New York allow taxpayers to claim casualty and theft losses on state returns even if the event was not federally declared.

Important Notice

The 2017 Tax Cuts and Jobs Act tightened eligibility, permitting deductions only for losses tied to federally declared disasters. Losses must also be uninsured to qualify.

For instance, if a tree falls on your home during a federally declared disaster and your insurance covers only part of the repair cost, the unreimbursed portion can be deducted. However, if the disaster is not federally declared, no federal deduction is allowed for the unreimbursed loss.

Impact of the Tax Cuts and Jobs Act on Casualty and Theft Losses

The IRS Publication 547 clarifies that personal casualty and theft losses are deductible only if they relate to federally declared disasters post-2017. This excludes losses from events like theft or vandalism unless they occur within such declared disasters.

Examples of qualifying events include floods, government-mandated demolitions due to disasters, mine cave-ins, shipwrecks, sonic booms, hurricanes, tornadoes, terrorist attacks, vandalism, and volcanic eruptions.

Only property owners can claim these deductions; renters cannot deduct losses to rented property but may deduct rent payments if applicable.

Handling Casualty and Theft Loss Gains

Insurance reimbursements for losses are considered gains and may be taxable. For example, if insurance pays for damage repairs and theft replacements during a federally declared disaster, that payment is counted as taxable income but can be offset by any uninsured losses.

Additionally, reimbursements received in a year following when the loss was deducted must be reported as income.

Reporting Your Casualty and Theft Loss

Report these losses on Schedule A of Form 1040 under casualty losses. The deduction is subject to a $100 reduction per event and only the amount exceeding 10% of your adjusted gross income (AGI) is deductible. Itemizing deductions is mandatory.

For example, if your car ($7,500) and jewelry ($1,800) are stolen, and your AGI is $38,000, you calculate your deductible loss as follows:

Total loss: $9,300
$9,300 - $200 (two $100 reductions) = $9,100
$9,100 - $3,800 (10% of AGI) = $5,300 deductible loss.

Remember, losses covered by insurance cannot be deducted.

Federal Emergencies in 2024

In 2024, FEMA declared 182 federal emergencies related to natural disasters across the United States.

Checking for Declared Federal Emergencies

To verify if your area is affected by a federally declared disaster, visit DisasterAssistance.gov or consult the IRS’s official list of federally declared disaster areas.

Can Misplaced Items Be Claimed?

Misplacing property does not qualify as a casualty or theft loss for tax purposes.

Summary

Post-2017 tax law changes restrict casualty and theft loss deductions to federally declared disasters. However, some states may offer broader deductions. Always verify your eligibility and ensure losses are uninsured to qualify for deductions.

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