Federal income tax significant events – Disasters and Theft

This article is the fourth in a continuing series about significant life events that have an impact on your federal income tax return filed with the Internal Revenue Service (IRS).  The topic of this article is disasters, thefts, and other events resulting in a loss of property.  Further reading about the areas covered in this blog is available on the IRS’s web site.

Casualty or Disaster

The IRS defines a casualty as an identifiable event that is sudden, unexpected, or unusual.  Loss relating to a casualty or disaster are deductible on your federal income tax return.

Natural disasters are one form of casualty.  Natural disasters can include hurricanes, tornados, earthquakes, floods, wildfires, and other events that cause property damage, loss of income, or loss of life.

When a disaster occurs, the IRS determines which taxpayers are in the affected area and automatically applies the appropriate relief measures to those taxpayers.  These relief measures can include but may not be limited to the following:

  • Postponement of filing and payment deadlines
  • Waiving of interest and penalties associated with late payment
  • Waiving of failure-to-deposit penalties for employment taxes
  • Waiving fees related to requests for copies of prior tax returns

The IRS generally does not forgive the actual tax liability of someone who is in an area affected by a disaster.  However, the IRS does allow taxpayers to deduct on their federal income tax return disaster-related losses for which you are not reimbursed by insurance or through other means.

If you are in an area affected by a disaster and you are not automatically identified by the IRS, or you are outside the physical area of the disaster but still suffer an impact, you should contact the IRS disaster hotline.

Another type of casualty is the loss of money because of the failure of a financial institution.  If you have deposits on hand above and beyond the amount insured by the Federal Deposit Insurance Corporation, this amount would be considered a loss and is deductible on your federal income tax return.

A loss is not considered a casualty if it relates to one of the following: accidental breakage of an item, damage caused by a family pet, fire you intentionally set, car accident caused by your negligence, or progressive deterioration of an item caused by normal weather or wear and tear through normal usage.

Theft

Theft is the taking of your property by another person.  Theft is also deductible on your federal income tax return.

For something to be considered theft, it must be illegal in the state where you reside.  Theft can include but may not be limited to the following: burglary, robbery, embezzlement, and kidnapping for ransom.  Theft does not include a loss because of a change in the value of property, such as loss in real estate value or a decline in the stock market, or because you have simply misplaced a piece of property.

 

Keep in mind that the information above is general in nature.  If you have experienced a disaster, theft, or other casualty loss, you should review on the IRS’s web site the specific relief available to you related to that disaster.  If you have questions or believe you are not receiving the appropriate relief, you should speak with a tax attorney who can guide you through the process.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.