Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 24

Nonbusiness Casualty and Theft Losses

A casualty or theft loss that is not covered by insurance or other reimbursement may be deductible as an itemized deduction. The loss is reported on Form 4684, Casualties and Thefts, and the total is transferred to Schedule A, Itemized Deductions, of Form 1040, U.S. Individual Income Tax Return, after accounting for two limitations:

1. Each separate casualty or theft loss is reduced by $100.

2. After this initial reduction, the total amount of all casualty and theft losses is reduced by 10% of adjusted gross income (AGI).

A taxpayer who suffers a disaster loss—which is a casualty loss occurring in an area eligible for federal disaster assistance—can choose to claim the deduction on the current or prior year's return.

A taxpayer who claims a casualty or theft loss must decrease the basis of property by both insurance reimbursements and any deductible casualty or theft loss. Amounts spent to restore property after a casualty increase the basis of the property.

When insurance or other reimbursements exceed the taxpayer's adjusted basis in the property, a tax gain can result from the loss of or damage to property. However, tax on the gain can be postponed, as explained in Chapter 13.

DEFINITION: Sudden means swift, not gradual or progressive.

Unexpected means ordinarily unanticipated and unintended.

Unusual means not a day-to-day ...