Casualty And Theft Losses

Casualty and theft losses are deductible losses that arise from the destruction or loss of a taxpayer's personal property. To be deductible, casualty losses must result from a sudden and unforeseen event. Theft losses generally require proof that the property was actually stolen and not just lost or missing.

Casualty and theft loss deductions are only allowed by the Internal Revenue Service for one-off events that are out of the ordinary and not a routine part of everyday life. The event also must be something that a person was not engaged with when it occurred. Natural disasters would qualify, including earthquakes, fires, floods, hurricanes and storms. Even though a loss may have been sustained by a natural cause, a loss cannot be claimed for something that occurred over time. An example of this would be property erosion, because the process is gradual.

Human activities, such as terrorist attacks and vandalism, are covered as well. It's notable that the deduction only applies to the owner of the property. For example, if a renter’s home is damaged in a fire, the landlord would be able to claim the deduction, not the renter. However, the renter may be able to take a deduction for rent payments, provided the deduction is filed in the same year that the loss occurred.

Losses that have been reimbursed by insurance are disallowed. Also, taxpayers must count claims paid in a later year for losses that were deducted in a previous year as income.

Casualty and theft losses are reported under the casualty loss section on Schedule A of Form 1040. They are subject to a 10% adjusted gross income (AGI) threshold limitation, as well as a $100 reduction per loss. The taxpayer must be able to itemize deductions to claim any personal losses.

A potential scenario: A taxpayer's car was stolen, as well as some jewelry that was in the car at the time of the theft. The car's fair market value was $7,500 and the jewelry was worth $1,800. The taxpayer’s AGI for the year was $38,000. Assuming that deductions are itemized, the taxpayer can deduct any loss amount above $3,800 (10% of AGI).

A total loss would be reported as follows:

$7,500 + $1,800 = $9,300 loss

$9,300 - $100 - $100 = $9,100 ($100 reduction for each loss)

$9,100 - $3,800 = $5,300 deductible loss to be reported on Schedule A. Finally, losses that have been reimbursed by insurance are disallowed. Claims that are paid in a later year for losses that were deducted in a previous year must be counted as income.