Disasters are never easy to handle. They come by surprise and the personal feelings that follow it are immeasurable. Fortunately, there are tax provisions that allow individuals to ease the painful costs that follow experiencing disasters like floods and wildfires. By claiming disaster losses on Form 4684, then reporting them as a deduction on your Schedule A for your individual 1040 filing, you can potentially lower what you owe in taxes.
Call it a Disaster
The Tax Cuts and Jobs Act of 2017 upended a lot of what everyone knew about the tax code. Casualty, disaster, and theft losses were no exception. Starting from 2018 through 2025, in order to be able to claim the casualty loss deduction, the President of the United States must officially declare a “federal disaster” in order for casualty losses to qualify. This is usually applied to large-scale natural disasters like wildfires and hurricanes that periodically hit states and regions.
Figuring the Loss
Once an official federal disaster is declared, you are now able to claim any related casualty losses, such as a damaged or lost car. Here’s a sample scenario:
Paul lives in Red Creek, CA, which was recently declared a federal disaster zone due to wildfires. His car, valued at $5000, was destroyed but fortunately firefighters were able to save his home. He also noticed his entire Knight Rider VHS collection was stolen by looters while the fire was raging. Insurance paid out to him $2000 for his lost vehicle, but did not cover his loss of his VHS collection.
He can only deduct for casualty losses the remainder of what is not covered by insurance. So Paul can claim up to $3000 in casualty losses. Theft-related losses are limited to the adjusted basis (aka the original cost) and not the fair market value (FMV) of the lost item. So even if his Knight Rider VHS collection may have commanded a high FMV from collectors, Paul can claim no more than what he paid for the tapes, which in this case was probably a paltry few bucks from a garage sale.
Loss Limitations
Of course there are limits to claiming casualty, disaster, and theft losses. A “$100 rule” applies for each casualty loss incident claimed which reduces the loss claim by $100. The total loss deduction is then subtracted against 10% adjusted gross income (AGI) of the individual. However, these rules do not apply to business property losses.
So, going back to the previous example, Paul’s wildfire and all losses related to it are considered one incident ($100 rule). After insurance reimbursement, his loss is $3000. Paul has an AGI of $32,000 for the year. Applying loss limitation rules, unfortunately we find out Paul cannot claim a casualty loss deduction because his loss is less than 10% of his AGI ($3,000 – 100 = $2,900, 10% of his AGI is $3,200, $2,900 – $3,200 = (300)).
Calculating casualty losses can get complicated. Busy owners may not have the time. Having a tax-savvy accounting support staff like us at MiklosCPA can ease that burden. We are a California-based accounting firm that helps small business clients of assorted industries with their accounting and tax needs. Reach out to us if you want to learn more of our services, and also follow us on our social media pages for more future “good to know” articles like this one.