Itemized Deductions from A to Z, Part 11: Some Rules Regarding Casualty and Theft Losses

This is part eleven  in our series on Itemized Deductions. To read the rest of the series, click here. For additional information regarding 2014 tax planning, you can download our 2014 Tax Planning Guide from the Resources tab on our website.

Thankfully, we don’t see a lot of casualty and theft losses. For a casualty loss to be deductible, the damage must be caused by a sudden and unusual event like a flood, fire, tornado or hurricane. Damage to your home as a result of a leaky roof or termites will not qualify nor would the accidental loss of a piece of jewelry—neither of these meets the “sudden and unusual event” designation. Special rules apply to losses from Chinese drywall.

In order to claim a loss for personal-use property (like a home), the loss is reduced by a $100 deductible and 10% of your adjusted gross income (which is found at the bottom of Form 1040, page 1, line 37). Any loss also is reduced by insurance proceeds. Another nuance is you must file a timely insurance claim if you have coverage. You cannot pass on filing an insurance claim and take a casualty loss for the entire amount. So, no deduction for a cracked windshield, but if a tree falls on your house you might qualify.

The loss is generally deductible in the year the casualty occurs—not when the damage is repaired. If your loss occurs in an area declared a Federal Disaster, the deduction can be taken on the current or prior year return. Claiming a loss can be tricky and imprecise as you might have to estimate the insurance recovery and file a return based on the remaining loss. Missing the loss or getting unexpected additional insurance proceeds can be corrected by amending returns.
Theft losses are deductible in the year you discover the loss. The same rules apply to embezzlement. As with all claims, you are required to file the loss with your insurance carrier. Also, make certain to gather as much documentation as possible such as police and insurance reports, pictures, statements from witnesses, etc. I did have someone once ask about a theft loss where the corporate officers of a publicly traded company embezzled funds and, as a result, the stock price dropped. Sorry, but that’s a capital loss and not deductible as a theft loss.

Planning Tip:
Rental or business-use property is filed and reported differently and not subject to the “sudden-event” test or floor. So, the full loss (less insurance recovery) should be deductible.

Next time, we’ll wrap up our series on deductions with a look at job expenses and miscellaneous deductions.