Okay, so this might be the matrix. Humans dressed in black have stolen your funds!
Just kidding, but, on a more serious note you may have experienced casualty and theft losses, and that can be devastating.
Have those loses incurred over the past year?
Did you know that the IRS will let you claim eligible losses on your personal property by using a particular form?
While nothing can replace the items you’ve lost, this step can allow you to you recoup some of your earnings to help cover the costs of replacement.
Today, we’re sharing the steps to take when you want to claim these losses on your tax return. Read on to make sure you’re on the right track!
The Role of the Tax Cuts and Jobs Act
The enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017 changed the way that taxpayers could claim casualties and thefts on their taxes. Specifically, it narrowed the eligible categories, as this deduction used to encompass a wide range of circumstances.
Starting in the tax year 2018 and active through 2025, you’ll only be able to claim such a loss if it occurs as a result of an event that the U.S. president declares as a disaster.
However, you do time to claim these losses on your 2017 return. You have three years (by 2020) do so by filing an amendment.
What Does “Casualty” Mean?
In tax terms, a casualty refers to any kind of property loss, damage, or destruction that occurs after one of these instances:
- A sudden and surprising event (not gradual or happening over time)
- An unexpected event that you did not anticipate or intend
- An unusual activity that is outside of your realm of normalcy
As you might expect, these kinds of events can vary in size, scale, and significance. Yet, all can inflict damage to your personal property or result in a catastrophic loss. Before the TCJA, some of the most common qualifying casualties included:
- Car accidents
- Weather events and natural disasters (earthquakes, fires, floods, hurricanes, tornadoes, volcanic eruptions)
- Government-mandated property demolition ordered because a home is unsafe after a federally-declared disaster
- Criminal acts (terrorist attacks, vandalism)
- Unexpected geographic catastrophes (mine cave-ins, shipwrecks, sonic booms)
In addition, you could also claim a casualty on your tax return if you experienced a loss on your financial deposits due to your bank or financial institution becoming bankrupt or insolvent.
If that were the case, you’d deduct it in one of the three following categories:
- Casualty loss
- Ordinary loss
- Non-business bad debt
However, the TCJA greatly limited the categories that qualify as casualties. Until 2025, the only way you can claim any of these losses on your taxes is if they’re related to a presidential-declared disaster.
If you do have one that qualifies, you’ll have to include the appropriate FEMA number related to the event, along with the location of your property when you claim your loss deduction.
What Does “Theft” Mean?
The term “theft” should be straightforward, but it can take many forms. To claim a theft on your taxes, you must have experienced the loss of property or money through an event that is:
- Illegal under the law in which the theft occurred
- Performed with a criminal intent
Before 2017, the IRS would accept claims for thefts that happened for a range of reasons including:
- Kidnapping (for a ransom)
Now, the only thefts eligible to report are those that occur due to a presidential disaster-area declaration.
For example, say a hurricane strikes your city, and the president declares your locale as a disaster area.
Your vehicle remained protected in the garage, but you lost a window in your home. From that entry point, a theft gains access to your home, breaks in, and steals your car.
While this scenario seems sensational, that’s the kind of relationship that you’ll need to prove if you want to claim a theft on your taxes.
Understanding Non-Deductible Losses
Of course, both casualties and thefts have fine print that you must read to make sure the event in question is eligible to claim on your taxes.
Before taking steps to obtain the proper forms, and complete the required documentation, check with the IRS to make sure you’re on the right track.
You can read the entirety of the tax law in IRS Publication 547, available here.
A few of the non-deductible casualty losses include those that occurred as a result of:
- An accidental breaking (e.g. You dropped a valuable plate and shattered it)
- A pet’s behavior (e.g. Your guard dog ruined your expensive sofa)
- An arsonic activity committed by or on behalf of you, the taxpayer
- A willfully negligent car accident caused by or on behalf of you, the taxpayer
- A progressive deterioration that happens over time (e.g. termite damage to your home)
At the same time, some of the non-deductible theft losses include:
- Misplaced property
- Lost property
The only exception? You might have lost a valuable item due to an unexpected or unforeseen event. In that case, it would be categorized as a casualty through 2017.
How to Claim a Casualty or Theft on Your Taxes
Once you’ve deemed that your event qualifies for a tax reward, you can take steps to claim it. Let’s review what to do!
First, locate IRS Form 4684: Casualties and Thefts.
You’ll enter your casualty and theft losses on this form, first. Once you follow the instructions and obtain the correct value, you can then enter that amount on Schedule A of your tax forms.
This way, it will join all of the other itemized deductions that you are claiming.
Finally, you’ll need to transfer the number on your Schedule A to line 40 on your Form 1040.
Casualty and theft losses are first reported and calculated on Form 4684, Casualties and Thefts. You can then enter the resulting number on Schedule A when you itemize, along with all your other itemized deductions, then transfer the number from Schedule A to line 8 of the 2017 Form 1040.
Before 2018, this line was line 40. However, recent IRS revisions to Form 1040, which are effective for the 2019 filing season, changed the location of itemized deductions or the standard deduction.
Claiming Your Casualty and Theft Losses the Right Way
It’s no secret that the tax law can be confusing. This is especially the case if you’re trying to navigate an intricate process, such as claiming your casualty and theft losses on your return.
While the recent enforcement of the TCJA does narrow the events that qualify for this tax reward, you might still be eligible to receive credit. To determine your status and receive help for these next steps, reach out to our office today!