If you suffer property damage during the tax year as a result of a sudden, unexpected or unusual event, you may be eligible to claim a casualty deduction for your property loss. Typically, the property loss is caused by a car accident in which you are not at fault or the result of extreme weather such as tornadoes and hurricanes. However, the casualty deduction is also available if you are the victim of vandalism.
Proving your casualty deduction
To claim a casualty loss deduction on your federal income tax, you must prove to the IRS that you are the rightful owner of the property. Most importantly, you must notify the IRS of any reimbursement you anticipate receiving from an insurance company or a lawsuit that is likely to result in a monetary settlement. You must reduce your deductible loss by these proceeds since the deduction only covers unrecoverable losses.
Actual property loss
The IRS requires you to use the smaller of the property’s tax basis or the decrease in fair market value in determining the deductible amount. In most cases, the tax basis is equal to the amount you originally pay for the property.
Suppose you purchase a new vehicle in 2014 for $25,000 and two years later when the vehicle is worth $15,000 you are in an accident that renders the car worthless. Although your actual loss is the $25,000 purchase price, for tax purposes, the loss is only $15,000 since this is the car’s fair market value on the day of the accident. However, if your car has a salvage value of $1,000 after the accident, your casualty loss decreases to $14,000.
Deductible property loss
Once you determine your actual loss, you must then reduce it by $100. This $100 reduction is applied to each separate casualty event, not each piece of property. For example, if your home is damaged by two separate hurricanes during the year, each hurricane is considered a separate event.
After applying the $100 reductions, your total casualty loss for the year is reduced again by an amount that equals 10 percent of your adjusted gross income. The net result is the deduction you can claim on your tax return.
Reporting your casualty deduction
Claiming the deduction requires you to complete IRS Form 4684. However, if the casualty loss is not the result of a federally declared disaster, you must be eligible to itemize your deductions to claim the loss. You are eligible to itemize on the Schedule A attachment to your return if your total deductible expenses for the year exceed the standard deduction amount for your filing status.
If you use TurboTax to prepare your taxes, we’ll ask you about your losses and fill in all the right forms for you.