If you take one look at FEMA’s website, it’s clear that we are going to see a significant increase in the number of casualty losses going forward. Should you find yourself a victim of a disaster or a casualty or theft loss it is very important that you know what you are entitled to from a tax perspective.

The best resource for this besides the US Tax Code is IRS Publication 547, Casualties, Disasters, and Thefts.  Be sure to review before or as part of preparing IRS Form 4684 when reporting to the IRS. Another good resource of course is the Instructions to the Casualty and Loss Reporting Form 4684.

Most people understand the proper tax treatment of what is often referred to as “standard” casualty and theft losses.

1. calculate the cost basis of the property before the loss

2. determine the decrease in the fair market value of the property as a result of the loss.

3. From the smaller of the two, deduct any insurance or other reimbursement received.

4. Using IRS Form 4684 apply the deduction limits to determine the amount of our deductible loss.

Here is where it starts to get convoluted. Each loss must be reduced by $100. And you further reduce the total of all losses by ten percent of your adjusted gross income.

It’s also important to remember that the loss must be reported the year in which it has occurred.

Before deducting the loss, you must be able to prove that there was a loss. If the loss is from theft for example: Read More