Writing Off Casualty Loss on Your Taxes

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Writing Off Casualty Loss on Your Taxes

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Losing property in any instance is difficult to deal with. Losing it to a sudden, catastrophic event like a hurricane can be even more devastating. Hurricane Harvey, for example, cost the average homeowner more than $111,000. If your property wasn’t insured, you may be able to claim casualty losses on personal property as itemized deductions on your federal income tax return.

Here’s more information about the process and how it could help you recover.

What Is Casualty Loss?

Casualty loss is defined as any damage, destruction or property loss occurring due to a sudden, identifiable event. Events that meet these criteria include:

  • Earthquakes
  • Hurricanes
  • Shipwrecks
  • Terrorist attacks
  • Tornados
  • Vandalism
  • Volcanic eruptions
  • Fires
  • Car accidents
  • Disaster-related demolition

Casualty loss also includes lost deposits after a bank or federally insured financial institution goes bankrupt or becomes insolvent. If the institution was not federally insured, the loss can still be claimed through miscellaneous itemization. However, this type of loss is sometimes deducted under the categories “ordinary loss” or “nonbusiness bad debt.”

How Casualty Loss Write-Offs Work

To write off casualty losses, you must itemize each piece of property using its adjusted basis amount and use that to determine the deduction total.

  1. Start by determining the value of the property. This is usually the purchase price or its value at the time you acquired it.
  2. Determine the item’s fair market value (FMV) price after the casualty event occurred.
  3. From steps 1 and 2, take whichever amount is smaller and subtract your expected insurance reimbursement, if any. This is the adjusted basis amount that you will use to determine your deduction.

Determining Your Deduction

Your deduction is found by taking your loss amount and subtracting it by the $100 threshold, then subtracting that amount by 10 percent of your adjusted gross income (AGI). This is the amount you can deduct on your federal tax return.

For example, if you have an uninsured vehicle with an adjusted basis of $10,000 and an AGI of $30,000:

  • Subtract the adjusted basis ($10,000) by the $100 threshold to get your total losses ($9,900)
  • Subtract 10 percent of your AGI ($3,000) from your total losses ($9,900)
  • The deductible loss for the vehicle is $6,900

To receive the deduction, you must be able to prove the property’s fair market value before the event and after. This typically requires working with an appraiser as well as keeping receipts and other useful documentation in a safe place.

If your total deduction amount is more than 10 percent of your AGI, you cannot claim casualty loss.

Nondeductible Events

These are examples of casualty loss events that cannot be deducted:

  • Accidentally breaking an item under normal conditions
  • Pet-related damage
  • Arson or preventable fires
  • Car accidents caused by willful negligence or purposeful intent
  • Property damage due to steadily progressive deterioration
  • Property loss due to drought
  • Termite or moth damage
  • Damage or destruction of trees due to fungus, disease and insects

How to Deduct

Casualty losses are calculated on IRS Form 4684, Casualties and Thefts. This calculation can then be itemized with your other deductions and transferred to line 40 of IRS Form 1040.

In most cases, casualty losses are deducted in the tax year immediately following the year in which the disaster occurred. However, if your loss was due to a federally declared disaster, you can make your claim on the prior year’s tax return using an amended return.

Your Timely Insurance Claim

If your property is covered by insurance, you must file a “timely” insurance claim to receive reimbursement. Otherwise, you cannot deduct casualty loss on your return. If you do file a timely return, you must reduce the loss by the amount of your expected insurance pay out.