Form 4684: Casualties and Thefts Definition & Overview

KEY TAKEAWAYS

• Taxpayers who itemize deductions may deduct gains or losses from thefts and casualties. The Internal Revenue Service (IRS) Form 4684 is used to report those losses.
• These are events that happened as a result of a disaster that was officially proclaimed by the President of the United States (federally declared disaster).
• Residents of federally declared disaster zones are exempt from itemizing deductions and can deduct the loss on Schedule A without itemizing other deductions . Additionally, their net casualty loss does not need to exceed 10% of adjusted gross income (AGI) to qualify for the deduction. If you are not itemizing your deductions, you can claim an increased standard deduction using Schedule A (Form 1040).

What Is Form 4684?

Form 4684 is a form provided by the Internal Revenue Service (IRS) that taxpayers who itemize deductions can use with the purpose of reporting gains or losses resulting from disasters and thefts. 

Floods, wildfires, and other disasters can cause casualty losses. Taxpayers can often write off losses in the tax year in which they occur or the theft is discovered.

What Is the Purpose of Form 4684?

The purpose of Form 4684 is to help taxpayers claim their deductions for losses resulting  from thefts and casualties. 

For losses related to federally declared disasters, see Section D of IRS Form 4684. Casualty  losses are typically only deductible in the tax year in which they occur. Although qualified  disaster losses are exempt from these rules. 

Losses incurred in places that have been officially designated as disaster areas are eligible for casualty deductions. You may elect to claim the loss in the prior tax year and there are other additional tax benefits. For an occurrence to qualify, the loss must fall within particular geographical regions, such as a state receiving a federal disaster declaration. 

In accordance with the IRS, a qualified disaster loss for the tax year 2021 additionally includes a person’s loss of or theft of their own personal property that is related to a catastrophic catastrophe that was declared by presidential proclamation and was dated between January 1, 2020, and February 25, 2021. (inclusive). 

However, the significant disaster must have an occurrence period starting between December 28, 2019, and December 27, 2020, in order to qualify (inclusive). 

The major disaster incident period must also terminate no later than January 26, 2021. This modification does not apply to losses related to a catastrophic disaster that was only proclaimed as a result of COVID-19.

Who Can File Form 4684?

Form 4684 should be filed by taxpayers reporting gains or losses due to a casualty or theft. Homeowners who were informed that they needed to demolish or move a building can file a loss claim using Form 4684. This is after a disaster that was officially proclaimed by the U.S. President. 

Affected individuals have the right to claim the casualty  loss on the difference between the home’s pre- and post-event values. However, within 120 days of the disaster area being declared, the owner must get notification from the building authorities.

Personal property losses and casualties are only deductible if they can be linked to a federally declared disaster. This is a disaster, where the President issued a federal proclamation. For people with personal casualty gains, the IRS permits an exception to this requirement. In that situation, the gains can be offset by the taxpayer. This can be done by using casualty and theft losses that aren’t related to a federally declared catastrophe. Residents of disaster zones are exempt from itemizing deductions while filing Form 4684. Taxpayers are not permitted to deduct costs associated with personal injuries using Form 4684.

How to File Form 4684

Form 4684 should be filled out and attached to your return or to an amended return for a prior claim. This is in a situation, where you are determined to have eligible casualty and theft losses. 

Fill out Section D of Form 4684 to claim losses related to federally designated disasters in the the prior tax year. Section B is used to report casualty and theft losses for a business property.

What Losses Can Be Deducted?

Losses from particular events that were not reimbursed may be deducted using Form 4684. Deductible casualty losses often need to be the consequence of an incident that was abrupt, unexpected, or unusual and happened during a disaster that the government has officially proclaimed a major disaster under the Stafford Act. Natural catastrophes like earthquakes, wildfires, floods, or tornadoes can also result in casualties. Shipwrecks, auto accidents, and vandalism are also types of casualties.  There are plans in place to help those who have suffered losses as a result of two additional issues. These are the caustic pyrrhotite concrete and corrosive drywall.

In rare cases, a casualty might also include the loss of deposits in financial institutions that go bankrupt or insolvent. There are rare situations where losses from things like Ponzi schemes can be deducted. Information needed to make deductions for these financial losses can be found in Section C of Form 4684.

What Are the Losses That Cannot Be Deducted?

Damage, on its own, might not, however, count as a deductible casualty loss. For instance, damage to a house brought on by a mold and fungus invasion is not regarded as a casualty loss. This is because such devastation results from a continuing process rather than an unexpected occurrence. A car accident may also cause damage. But if the taxpayer was intentionally negligent in triggering the accident, those losses are not deductible.

Embezzlement and larceny occurrences can result in theft losses. These damages are covered if the theft was intentional and a crime was committed in the state where the incident took place. In some situations, fraud may be seen as theft if it is illegal under state or local law. 

Damages might not be deductible, however, if losses come from a drop in a business’s stock price as a result of unethical behavior of the corporate management. However, a capital loss from this type of situation may be used to offset a taxpayer’s capital gains or lower taxable income.

What Is the Gain on Reimbursement?

A reimbursement is a payment given by a business or organization to cover any out-of-pocket expenses incurred by a worker or any overpayments received from clients or other parties with whom the company does business. Simply put, reimbursement is the money you receive from a previous transaction in which you purchased something or made a payment on someone else’s behalf.

Many of the daily activities and purchases you make are eligible for compensation. Given that both of these expressions allude to receiving your money back from a previous transaction, this term is very close to the term refund and is also quite comparable to it in essence. They are not the same, however, as a refund is a money received as a result of an overpayment or a return of goods.

If the amount of insurance reimbursement exceeds the cost of your property, you have a gain and you may be required to pay tax on it.

If you obtain property that is functionally equivalent to or linked to damaged, lost, or stolen property, you do not need to recognize the gain on this transaction. The cost basis of the  new property is the same as the basis you had in the previous one.

Include the reimbursement as income on your return if you are reimbursed for a loss that you claimed as a deduction in a prior year to the extent the deduction reduced your tax in the previous year.

Summary

You might be able to claim a casualty deduction for your property loss if you sustain property damage during the tax year as a result of a sudden, unexpected, or exceptional incident. Usually, the loss of property results from a traffic accident for which you are not at fault or from severe weather events like tornadoes and hurricanes. However, the casualty deduction is also available to you, if you are a victim of theft or vandalism

The Tax Cuts and Jobs Act eliminated the itemized deduction for personal casualty and theft losses beginning in 2018 and continuing until the 2025 tax year.

However, the new rule still allows the taxpayer to deduct personal casualty losses resulting from a major disaster that happened in a region where the President has issued a federal proclamation.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.