Documenting Theft and Casualty Losses for Year-End

If you’ve experienced a theft or casualty loss, you may be feeling confused or frustrated by the process of claiming deductions. The IRS and courts have strict requirements, and even legitimate losses are often denied because of missing paperwork or misunderstandings about the rules. 

Here’s what you need to know to avoid common pitfalls and help your claim stand up to scrutiny.

What counts as a theft or casualty loss deduction?

Theft losses

For federal income tax purposes, theft is defined broadly to include larceny, embezzlement, robbery, and similar crimes. The loss must result from an illegal act under state law committed with criminal intent.

Not every loss qualifies: Losses from bad investments or nonfraudulent misrepresentations don’t count as theft. Deductions can be also denied if a taxpayer doesn’t report the loss to the police. If qualified, theft losses are generally reported on a taxpayer’s return for the year the theft was discovered.

Personal casualty losses (federally declared disasters)

Personal casualty losses arise from events such as fire, storm, shipwreck, or other sudden, unexpected, or unusual events, as well as theft. The event must be identifiable, damaging to property, and sudden, not gradual or foreseeable. Under current tax law, personal casualty losses are generally only deductible if attributable to a federally declared disaster.

What documentation do I need for loss deductions?

To support your deduction, you’ll need to gather and organize:

• Proof of the event:
• Police reports, fire reports, or weather records
• FEMA codes and IRS announcements for federally declared disasters
• Photographs showing damage or loss
• Proof of ownership and value:
• Receipts, titles, deeds, or contracts
• Appraisals or repair estimates showing property value before and after the event
• Insurance claims and recoveries:
• Documentation of promptly filed claims and compensation received
• Records showing there’s no reasonable prospect of recovery at year-end
• Timeline and communications:
• A detailed timeline of events, including discovery, claims, repairs, and correspondence with agencies or insurers

Special rules and limitations of casualty and theft losses

• Personal casualty losses are only deductible if attributable to a federally declared disaster, unless offset by personal casualty gains
• Additional limitations include a $100-per-casualty floor and a 10%-of-AGI threshold
• Qualified disaster losses aren’t subject to the 10% AGI reduction, and the $100 reduction increases to $500. See IRS Publication 547 for details.

Questions to ask your tax advisor

• What exactly qualifies as theft or casualty for tax purposes?
• How do I prove the amount and timing of my loss?
• What forms do I need to complete (like IRS Form 4684: Casualties and Thefts)?
• What are the limitations and thresholds for claiming these deductions?
• How do insurance claims and recoveries affect my deduction?
• What if my situation is complex or involves multiple agencies?
• How do I handle losses related to federally declared disasters?

How CLA can help with loss deductions and IRS Form 4684

To withstand IRS scrutiny, a theft or casualty loss deduction requires thorough, contemporaneous documentation and a clear understanding of the rules.

CLA tax professionals can help you interpret IRS regulations, prepare timelines and forms, and compile evidence like police reports, appraisals, and insurance records. We also offer resources and support for losses related to federally declared disasters.

Contact us

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