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Form 4684: Casualties and Thefts Definition & Overview

Updated: November 25, 2022

There can be a few ways to go about certain deductions as a taxpayer. You have the choice to take the standard deduction, for example, which is a dollar amount that you can use to reduce your income tax. 

But what if you have a ton of deductions and itemizing them is the best option for you? This is another option for you to consider and it all depends on individual circumstances. But if you do itemize your deductions, Form 4684 covers how to do this for accidents and thefts. Read on to learn everything you need to know!

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    KEY TAKEAWAYS

    • Taxpayers who itemize deductions may deduct gains or losses from thefts and casualties. This is according to the Internal Revenue Service (IRS) Form 4684.
    • These are events that happened as a result of a disaster that was officially proclaimed by the government.
    • Residents of federally declared disaster zones are exempt from itemizing deductions. This is while filing Form 4684.

    What Is Form 4684?

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

    Floods, fires, and other similar disasters can cause casualty losses. Taxpayers can often write off losses in the tax year in which they occur. In a theft case, the year of loss discovery is the tax year.

    Turn Tax Pains Into Tax Gains

    What Is the Purpose of Form 4684?

    The purpose of Form 4684 is to help taxpayers itemize their deductions for losses that come about from thefts and accidents. 

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

    Losses from places that have been officially designated as disaster areas are eligible for deductions. This is from the prior tax year and comes with additional tax benefits. For an occurrence to qualify, the loss must fall within particular geographical regions. These are regions that have been declared disaster areas.

    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 catastrophe that was only proclaimed as a result of COVID-19.

    Who Can File Form 4684?

    Form 4684 should be filled out by taxpayers reporting gains or losses due to an accident 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 government.

    These people have the right to 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 disaster. This is a disaster that the government has proclaimed. 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 the case that you have decided that your casualties or thefts qualify for a deduction. 

    Fill out Section D of Form 4684 to claim losses related to federally designated disasters for the prior tax year. It’s important to remember that this form often only relates to personal losses. It does not relate to accidents or thefts involving company property.

    What Are the Losses That Can Be Deducted?

    Losses from particular events that were not paid 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. Natural catastrophes like earthquakes, fires, floods, or storms can also result in casualties. Shipwrecks, auto accidents, and vandalism are some additional sorts of disasters. Additionally, there are plans in place to help those who have suffered losses as a result of two issues. These are 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.

    It's Time For Owners To Own Tax Season

    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. 

    This is 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. 

    Damages might not be deductible. Nevertheless, if losses come from a drop in a business’s stock price as a result of unethical behavior on the part of corporate management. However, a capital loss from these losses may be generated, which 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 for yourself or made a payment on someone else’s behalf.

    Many of the daily activities and purchases you perform 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.

    You make a profit if the insurance payout or other form of reimbursement exceeds the purchase price or other foundation of the property. If you make a profit, you might have to pay taxes on it or you might be able to put off the payment of the profit.

    If you obtain property that is functionally equivalent to or linked to damaged, lost, or stolen property, you do not need to record the gain on those items. The foundation you have for the new property is the same as the basis you had for 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. This is only 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, if you are a victim of theft or vandalism, the casualty deduction is also available to you.

    The Tax Cuts and Jobs Act prohibited 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 that happen in a region where the President has declared a disaster and are a direct result of the disaster.

    Less Taxin'. More Relaxin'

    FAQS on Form 4684

    What Qualifies for a Casualty Loss Deduction?

    Any abrupt, unforeseen, or uncommon event qualifies for a casualty loss deduction. This includes things such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. Essentially anything that can cause damage to, destruction of, or loss of your property.

    What Is Required to Determine the Amount of a Casualty Loss or Gain?

    You must be ready to demonstrate both the extent of your loss and the fact that you lost property in a casualty. This is in order to qualify for a casualty loss deduction. Knowing your basis in the property, its pre-, and post-casualty worth. And the amount of compensation you get is necessary for this.

    When Can You Claim a Hurricane Loss on Your Taxes?

    In general, you can file a claim for your hurricane-related losses associated with a federally declared disaster either in the year of the disaster or the year before it. By claiming a loss from a previous year, you might be able to lower your taxes for that year and get your refund sooner.

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