Casualty Losses

Due to the limitations on these casualty and theft losses, there is not much opportunity for a deduction. If your loss is covered by insurance, it is unlikely you will have a deductible loss. This section applies only to non-business casualty and theft losses. A casualty or theft loss for a business (for an individual) is deductible on Schedule C with the limitations discussed here.

Casualties

A casualty is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

• A sudden event is one that occurs quickly, not gradually over time.
• An unexpected event is one that is not anticipated or intended.
• An unusual event is one that Is not a day-to-day occurrence and not typical of the activity in which you were engaged.

Deductible casualty losses include car accidents, earthquakes, fires, floods, shipwrecks, sonic booms, storms, hurricanes, tornados, terrorist attacks, vandalism, and volcanic eruptions.

Non-deductible casualties include accidentally breaking articles such as china, the loss of a family pet, a fire you willfully set or pay to have set, or a car accident if your willful negligence caused it.

Progressive deterioration is not a deductible casualty loss. Examples of this include

• The steady weakening of a building due to normal wind and weather conditions
• Deterioration and damage to a water heater that bursts. Damage to carpet, furnishings, etc. due to a burst water heater do qualify, however.
• Loss due to drought, termite or moth damage
• Damage to trees and shrubs from a fungus, disease, worms, or similar pests. However, sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss.

Theft

Theft is defined as the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the laws of the sate where it occurred and must have been done with criminal intent.

Theft includes:

• Blackmail
• Burglary
• Embezzlement
• Extortion
• Kidnapping for ransom
• Larceny
• Robbery
• Threats

Also, the taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.

If stocks you own decline in market value due to accounting fraud or other illegal misconduct the loss is not a theft loss.

The simple disappearance of money or property is not a theft. This may give rise to a casualty loss, however.

Deducting a loss

In order to deduct a theft or casualty loss, you should complete Form 4684. The amount of your deductible loss is the lesser of your adjusted basis or the decrease in fair market value as a result of the casualty or theft. These amounts are subject to three reductions:

• The loss must be reduced by any insurance proceeds or other reimbursement you receive. If the insurance or other reimbursement exceeds your cost, you may have a taxable gain.
• The amount of each loss is further reduced by $100.
• The total of all losses is added, then the total is reduced by 10% of your adjusted gross income.

Other casualty and theft loss information

If you filed your return using your expected reimbursement and the amount received was not what was expected, you would have to adjust your return for the year in which you actually receive the reimbursement.

A casualty loss is usually deductible only in the year in which the casualty occurred.

A theft loss is deductible in the year in which the theft is discovered.

If a casualty or theft loss is covered by insurance and you do not submit a claim to your insurance carrier, you cannot deduct the loss.

If your loss is the result of a disaster that occurred in a Presidentially declared disaster area, you can deduct the loss in the year it occurred or in the year immediately preceding the disaster occurred. For example if you have a loss in 2008 due to a hurricane and the President declares your area to be a disaster area, you may deduct the loss on your 2008 return. Or, you may deduct the loss on your 2005 return, even if this means filing an amended return.