Beginning in 2018, the Tax Cuts and Jobs Act suspended the itemized deduction for personal casualties and theft losses for tax years 2018 through 2025.
The taxpayer, however, can still claim personal casualty losses which occur in a presidentially declared disaster area and are a direct result of the disaster, according to the new law.
For tax years prior to 2018, you can deduct losses from fire, storm, flood, shipwreck, or other casualty. You can also deduct losses from thefts such as larceny, embezzlement, and robbery. You can even deduct the loss of deposits because of the insolvency or bankruptcy of a financial institution such as a bank or a credit union.
If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Otherwise, you cannot deduct the loss. However, the part of the loss that is not covered by insurance would still be deductible.
If you incurred expenses for proving that you had a property loss, you would enter those expenses as a Miscellaneous Deduction subject to the 2% rule. Examples of these costs would be appraisal fees and photographs used to establish and validate the amount of your loss. DO NOT enter these expenses as a casualty or loss item on Form 4684.
What CANNOT be deducted?
You cannot deduct any of the following:
- Costs for protection against future casualties
- Money or property that was misplaced or lost
- Breakage of china, glassware, furniture, and similar items under normal conditions
- Progressive damage to property (buildings, clothes, trees, etc.) caused by termites, moths, other insects, or disease
What about Insurance or other reimbursements?
If the amount you receive in insurance or other reimbursement is more than the cost or other basis of the property, you have a gain. If you have a gain, you may have to pay tax on it, or you may be able to postpone the gain.
Do not report the gain on damaged, destroyed, or stolen property if you receive property that is similar or related to it in service or use. Your basis in the new property is the same as your basis in the old property.
If you receive a reimbursement for a loss that was deducted in a previous year for which you claimed a deduction, include the reimbursement as income on your return (only to the extent the deduction reduced your tax in the previous year).
When do I need to claim the casualty/loss?
Normally, the deduction will need to be claimed on the tax return in the tax year the casualty/loss occurred. However, a loss due to a disaster may be treated differently.
A disaster loss may also be claimed in the following year if you reasonably believed you would be reimbursed for the loss but were not.
Example: You sustained a loss in 2019 due to a federally declared disaster in your area, You immediately submitted your claim with your insurance company and had reason to believe you would be fully reimbursed for the damages. The insurance company did not settle the claim until the next tax year (2020) and only paid a portion of the loss. The disaster year is 2020 when you were reimbursed (not the previous year when the disaster occurred) because it is then that you became certain whether you would be reimbursed. You have the option to deduct the loss on either the 2020 or the 2019 return. If you choose to file the loss on the previous tax return, you would need to file an amended return.
For more information on reporting a gain from the reimbursement of a casualty or theft loss, please reference the IRS instructions for Form 4684.
Where do I report my casualty and loss?
If you qualify for the casualty and loss deduction during the tax year, enter your information in the program under:
- Federal Section
- Enter Myself
- Itemized Deductions
- Less Common Deductions
- Casualties and Losses (Form 4684)