Disappearance of Theft Loss Deductions

For many years, the U.S. tax code allowed individuals and businesses to deduct certain financial losses due to theft. These deductions provided some measure of relief to victims of crime who suffered substantial property or monetary loss. However, that changed with the passage of the Tax Cuts and Jobs Act, which overhauled several long-standing tax provisions, including the ability to deduct most personal theft losses.

What Changed Under the Tax Cuts and Jobs Act?

Enacted in December 2017 and effective from January 1, 2018, the Tax Cuts and Jobs Act introduced a temporary suspension on the deduction of personal theft and casualty losses. Under this law, taxpayers may no longer claim theft losses unless they occur within a federally declared disaster area. This rule will remain in effect until at least December 31, 2025, unless new legislation alters the landscape before then.

This suspension applies to individuals and businesses alike. Previously, victims of crimes such as burglary, fraud, or embezzlement could use theft loss deductions to reduce their taxable income. With the new law, only those impacted by federally declared disasters—such as hurricanes, floods, or wildfires—retain the right to claim certain losses.

What Qualifies as a Theft Loss?

A theft loss involves the unlawful taking of money or property with the intent to deprive the owner. The IRS outlines several types of incidents that can constitute a theft loss, including:

• Burglary
• Robbery
• Embezzlement
• Extortion
• Blackmail
• Larceny
• Fraud
• Kidnapping for ransom

To qualify, the loss must result from an intentional act committed by another party. There must be evidence of criminal behavior, and there must be no reasonable expectation that the lost property or funds will be recovered.

For example, if you ordered a product online, never received it, and couldn’t secure a refund, that could be considered a theft. Likewise, if someone hacks into your bank account and steals money, the IRS would categorize this as a theft loss. However, if you loaned money to a friend who failed to repay it, or if you simply misplaced cash, those situations do not meet the criteria.

Deducting Theft Losses Before and After 2018

Before the Tax Cuts and Jobs Act took effect, theft losses were deductible on Schedule A of a taxpayer’s return, subject to certain limitations. Taxpayers could deduct the portion of the loss that exceeded $100 and was greater than 10% of their adjusted gross income.

Here’s a simple breakdown of how it worked:

• Determine the amount of the theft loss.
• Subtract any insurance reimbursement or expected recovery.
• Subtract $100 from the total.
• Subtract 10% of the taxpayer’s adjusted gross income.
• The remaining amount was deductible.

Since 2018, however, this process is no longer relevant for theft losses outside of federally declared disaster areas. The new rules restrict deductions only to those impacted by federally recognized events, cutting off an important tax relief mechanism for most victims of theft.

Form 4684: Reporting Theft and Casualty Losses

Form 4684 is used to report theft and casualty losses to the IRS. This form remains available and applicable, particularly in cases where the theft or loss occurred within a federally declared disaster zone. It walks the taxpayer through the process of calculating the deductible amount and must be attached to their individual or business return.

Despite the limited applicability under current law, understanding Form 4684 remains important. It provides a consistent framework for calculating the value of a loss, whether or not the loss ultimately qualifies for deduction under current legislation. The form helps taxpayers determine the decrease in the fair market value of the property, subtract any insurance reimbursements or salvage value, and identify the final deductible loss amount. 

Even if a loss doesn’t currently qualify due to the suspension under the Tax Cuts and Jobs Act, maintaining thorough documentation through Form 4684 can be beneficial in future tax years when the law may change. Additionally, for those involved in complex cases—such as business property losses or partial insurance reimbursement—Form 4684 helps establish a standardized record for audit protection and accurate filing. It is advisable for taxpayers to consult with a tax professional when completing the form to ensure correct valuation and compliance with IRS requirements.

Example Case Study: Understanding the Real-World Impact

Consider the case of David, who gave his fiancée, June, a $100,000 check as an investment in her startup business. They agreed that she would repay him over a period of time. However, June disappeared with the money. Eventually, she was located and convicted of fraud. During the investigation, it was revealed that June had already spent $50,000, leaving only half of the investment recoverable.

Under pre-2018 tax rules, David would have been able to claim the unrecoverable $50,000 as a theft loss, helping to offset his financial burden. But with the changes brought about by the Tax Cuts and Jobs Act, David is no longer able to claim that loss on his taxes—unless the crime occurred as part of a federally declared disaster event, which it did not.

Fraud and Cybercrime: An Increasing Risk Without Relief

As digital transactions become more commonplace, cybercrime and online fraud have emerged as major concerns for both individuals and businesses. Unfortunately, the current tax rules do not allow victims of these crimes to claim deductions unless the loss is connected to a disaster area.

For instance, if someone falls victim to a phishing scam and loses thousands of dollars from their bank account, they cannot claim that amount as a deduction on their federal return. This lack of financial relief can add insult to injury, particularly when victims are already struggling with the consequences of the crime.

Impact on Small Businesses

Small businesses are particularly vulnerable under the current law. Theft of inventory, embezzlement by employees, or scams affecting business accounts all present serious financial risks. Yet, unless the loss is somehow tied to a declared disaster, the IRS provides no tax relief. The suspension of theft and casualty loss deductions under the Tax Cuts and Jobs Act has left a significant gap in the financial safety net that small businesses once relied on. These businesses often operate with tighter margins and fewer resources, making them less able to absorb unexpected losses.

This creates a challenging environment for entrepreneurs. With fewer protections in place, business owners must consider alternative strategies for managing risk, such as purchasing additional insurance coverage or implementing stronger internal controls. This includes policies such as segregating financial duties, conducting regular audits, and training staff to recognize fraudulent activity. Business interruption insurance and crime coverage can also provide a critical layer of protection, although these options may come with added costs.

Furthermore, small business owners must keep meticulous records of all losses and incidents. While these records may not currently result in tax relief, they can be essential in seeking legal remedies or qualifying for future deductions should tax laws change. Proactive risk management and comprehensive documentation are now more important than ever.

Planning for the Future

The sunset provision in the Tax Cuts and Jobs Act means that, unless the law is extended or revised, personal theft and casualty loss deductions will be reinstated on January 1, 2026. Taxpayers should remain aware of this timeline and track relevant legislative developments.

In the meantime, here are a few proactive steps to consider:

• Maintain comprehensive insurance coverage to protect against theft and natural disasters.
• Document all incidents of loss thoroughly, including police reports, photographs, and correspondence.
• Consult with a tax professional about other possible forms of tax relief.
• Keep abreast of any changes to federal tax law that could alter the deductibility rules.

Role of Federally Declared Disasters

The one significant exception to the current rule involves federally declared disaster areas. When a natural or man-made event causes extensive damage and receives an official declaration, affected taxpayers may be eligible to deduct both theft and casualty losses.

For example, following Hurricane Michael in 2018, parts of Florida were designated disaster areas. Residents who suffered losses due to the hurricane could claim deductions on their 2018 tax returns. In these instances, the IRS also typically offers additional support, such as deadline extensions and expedited processing.

Understanding Casualty Losses and Their Limitations Under the Current Tax Law

In the wake of the Tax Cuts and Jobs Act, many taxpayers have found themselves grappling with a reduced set of options when it comes to claiming deductions for unexpected financial losses. While theft losses have been virtually eliminated for most, casualty losses still offer a potential deduction avenue—but only under narrowly defined circumstances. Understanding the current tax treatment of casualty losses is essential for anyone affected by property damage from disasters or accidents.

Casualty losses are only deductible if the event causing the loss occurs in a federally declared disaster area. This means that everyday misfortunes, like a house fire unrelated to a larger disaster or a tree falling on a car during a local storm, generally do not qualify. Even for those in disaster zones, the rules are strict: taxpayers must reduce the loss by any insurance compensation received, subtract $100 per event, and further reduce the total by 10% of their adjusted gross income. These calculations can significantly diminish or even eliminate the deduction.

Given these hurdles, it’s crucial for taxpayers to stay informed about federal disaster declarations and to maintain clear, detailed records of any property damage, insurance claims, and related costs. Proper documentation and timely filing are essential to ensuring any available deduction is preserved and maximized.

What Is a Casualty Loss?

A casualty loss occurs when a taxpayer’s property is damaged or destroyed by a sudden, unexpected, or unusual event, resulting in a measurable financial loss. These qualifying events can include natural disasters such as fires, floods, earthquakes, hurricanes, tornadoes, volcanic eruptions, and man-made incidents like vandalism, car accidents, explosions, and shipwrecks. 

For the loss to be deductible, the damage must arise from a single, identifiable event rather than from ongoing conditions. Losses stemming from gradual deterioration, negligence, or poor maintenance—such as termite damage, mold accumulation over time, or long-term wear and tear—do not meet the criteria for a casualty loss.

How Casualty Losses Were Treated Before 2018

Prior to the enactment of the Tax Cuts and Jobs Act, taxpayers could deduct casualty losses on their individual income tax returns, even if the loss was not related to a federally declared disaster. These deductions were subject to certain limits:

• The loss had to be reduced by any insurance reimbursement.
• The resulting amount had to be reduced by $100 per casualty event.
• Only the amount exceeding 10% of the taxpayer’s adjusted gross income could be deducted.

For example, if a person experienced a house fire and incurred $25,000 in damages, with $15,000 reimbursed by insurance, their potential casualty loss deduction would be:

• $25,000 (damage) – $15,000 (insurance) = $10,000
• $10,000 – $100 = $9,900
• Subtract 10% of AGI (assuming AGI of $60,000): $6,000
• Deductible amount = $3,900

This system allowed for some financial relief, especially for those without sufficient insurance coverage.

Changes Introduced by the Tax Cuts and Jobs Act

Since January 1, 2018, the landscape has changed dramatically. Under the new law, casualty losses are only deductible if the loss occurred in an area designated as a federally declared disaster zone. This change significantly narrows the pool of eligible taxpayers and eliminates deductions for damage caused by isolated events or accidents not tied to a disaster.

For instance, if a tree falls on a taxpayer’s garage due to high winds, they cannot deduct the loss unless the storm was part of a federally declared disaster. Similarly, if a home is vandalized or damaged by a car accident, no deduction is allowed unless the event is associated with a qualifying disaster.

What Is a Federally Declared Disaster?

A federally declared disaster is one officially recognized by the President of the United States under the Stafford Act. The Federal Emergency Management Agency (FEMA) is responsible for evaluating events and making recommendations to the President. Once an area is declared a disaster zone, residents become eligible for various forms of federal assistance, including potential tax relief.

These declarations typically follow severe weather events such as hurricanes, wildfires, and major floods. For example, Hurricane Michael led to disaster declarations in multiple Florida counties in 2018. Affected residents could then claim casualty losses related to the storm when filing their 2018 tax returns in 2019.

Role of Insurance in Casualty Loss Calculations

Before calculating a casualty loss deduction, taxpayers must first account for any reimbursements from insurance or other sources. The IRS requires that any expected reimbursement be deducted from the total loss before calculating the deductible portion.

If the insurance payment exceeds the value of the damaged property, it may result in a gain rather than a loss. In such cases, the taxpayer may need to report a taxable gain. For example, if a home worth $100,000 is destroyed and the insurance company pays out $120,000, the $20,000 excess could be subject to tax, depending on how the funds are used and whether a replacement property is purchased within a certain timeframe.

Claiming a Casualty Loss Deduction

To claim a casualty loss deduction related to a federally declared disaster, taxpayers must:

• Complete Form 4684, detailing the nature of the loss and the property affected.
• Transfer the final amount from Form 4684 to Schedule A of Form 1040.
• Ensure that all calculations reflect the necessary adjustments for insurance reimbursement, the $100 per-event reduction, and the 10% AGI threshold.

Because deductions for casualty losses are itemized, the taxpayer must also choose to itemize rather than take the standard deduction. This decision can affect the overall benefit of claiming the loss.

Record-Keeping and Documentation Requirements

Accurate records are critical for substantiating casualty loss claims. The IRS recommends maintaining:

• Photographs or videos of the damaged property
• Insurance claims and settlement documents
• Police or fire department reports
• Repair estimates and receipts
• Appraisals of property before and after the event

These documents provide the necessary evidence to support the deduction and may be required during an audit.

Example Scenario: Casualty Loss in a Federally Declared Disaster Zone

Sarah owns a home in a coastal town affected by a hurricane. The storm causes $40,000 in damage, but her insurance only covers $25,000. The area is declared a federal disaster zone.

Sarah’s adjusted gross income is $80,000. Her casualty loss deduction would be calculated as follows:

• $40,000 (damage) – $25,000 (insurance) = $15,000
• $15,000 – $100 = $14,900
• 10% of AGI = $8,000
• Deductible amount = $6,900

Sarah completes Form 4684 and includes the final deductible amount on her Schedule A, choosing to itemize her deductions.

Special Rules for Business and Income-Producing Property

Different rules apply when casualty losses affect business or income-producing property. In these cases, the $100 and 10% AGI reductions do not apply. The loss is calculated as the lesser of:

• The decrease in the fair market value of the property due to the damage
• The property’s adjusted basis (typically its purchase price plus improvements)

Any insurance reimbursement is still deducted from the total loss.

Businesses can report these losses directly on their tax return without needing to itemize deductions, which makes the process more streamlined compared to personal losses. Additionally, these losses can offset other income, providing more immediate tax relief.

Preventative Strategies and Risk Management

Given the limitations under current law, taxpayers must be proactive in managing risk. Steps include:

• Reviewing and updating homeowner’s or renter’s insurance policies regularly
• Purchasing flood or earthquake insurance if in high-risk areas
• Conducting regular property maintenance to reduce vulnerability to damage
• Creating and storing inventories of personal property with estimated values

While these strategies do not replace the tax deduction, they can mitigate financial exposure in the event of a loss.

Looking Ahead to 2026 and Beyond

The provisions of the Tax Cuts and Jobs Act are temporary and scheduled to expire after the 2025 tax year. Unless Congress acts to extend the law, the rules surrounding casualty and theft loss deductions will revert to their pre-2018 status. That means taxpayers may once again claim losses unrelated to federally declared disasters.

This potential change adds an additional layer of complexity to long-term tax planning. Taxpayers and advisors alike should stay informed about proposed legislative changes that could affect future tax filings. Planning today could help maximize deductions tomorrow.

Navigating Theft and Casualty Loss Deductions Post-2025

As the temporary provisions of the Tax Cuts and Jobs Act approach their scheduled expiration at the end of 2025, taxpayers and tax professionals are beginning to consider the potential implications for theft and casualty loss deductions. For years, these deductions served as essential relief tools in the aftermath of unexpected financial and property-related losses. Although significantly limited under current law, a possible reversion to pre-2018 rules could reshape how individuals and businesses manage risk and prepare for the future.

Understanding the nuances of what may change and how to plan accordingly will be crucial. This article provides a forward-looking perspective on potential scenarios, offers tax planning strategies, and discusses how individuals and businesses can prepare for the evolving tax environment related to theft and casualty losses.

Current Law Summary and Its Limitations

Under the existing law, theft and casualty loss deductions are mostly suspended through the end of 2025, with the only exception being losses attributable to federally declared disasters. Personal theft losses that were once deductible are now excluded from tax benefits, regardless of the extent of the financial harm. Similarly, personal casualty losses unrelated to disaster events do not qualify for deductions.

Businesses and income-producing properties still have some relief options. However, individuals without federally declared disaster status or without business involvement generally have no recourse for claiming these deductions.

Anticipating a Return to Pre-2018 Tax Rules

Unless Congress enacts new legislation extending or permanently modifying the Tax Cuts and Jobs Act provisions, the pre-2018 rules are expected to resume starting in 2026. If that happens, theft and casualty losses will once again be eligible for deduction under broader circumstances.

Under the older rules:

• Personal theft and casualty losses were deductible as itemized deductions.
• Deductions were subject to a $100 per-event reduction and a threshold of 10% of adjusted gross income.
• Losses had to be substantiated with documentation and adjusted for any insurance or reimbursement.

The reintroduction of these provisions could dramatically alter tax planning strategies and restore a significant benefit for taxpayers facing financial loss due to crime or unforeseen disasters.

Strategic Tax Planning for Individuals

Reassessing Insurance Coverage

Even if tax deductions return in 2026, individuals should not rely on tax relief alone. Insurance remains the most immediate and effective method of protecting against loss. Taxpayers should evaluate whether their current policies adequately cover theft, natural disasters, and accidents.

Adding optional coverages like flood or earthquake insurance may help mitigate risk, particularly for those living in high-risk areas. Ensuring personal property riders are attached to homeowner’s or renter’s policies can also prevent underinsurance.

Preparing for Itemization

With the possibility of expanded deductions, individuals should be prepared to shift from taking the standard deduction to itemizing expenses. Keeping thorough records of all deductible losses and personal expenditures becomes even more important if itemizing becomes the more advantageous route.

Taxpayers may wish to organize receipts, contracts, estimates, appraisals, and insurance statements in advance to streamline the deduction process when the law changes.

Documenting Property Value

To effectively claim a theft or casualty loss, it’s important to determine the value of the property both before and after the loss. Taxpayers should maintain clear records of original purchase prices, fair market valuations, and any depreciation.

Taking inventory with supporting photographs or videos, along with professional appraisals for high-value items, will enhance the likelihood that any future claim is accurate and substantiated.

Strategic Tax Planning for Businesses

Review Risk Exposure

Businesses are more vulnerable to a wide range of risks than individual taxpayers. Theft, fraud, and property damage can disrupt operations and result in significant financial losses. Conducting a risk audit can help identify exposures that are not adequately covered by insurance or current tax benefits.

Understanding which losses may become deductible again in 2026 will help businesses reassess whether to adjust insurance premiums, retain more liquidity, or increase reserves.

Update Record-Keeping Systems

Businesses that experience theft or property damage must maintain robust accounting and documentation systems. When losses are sustained, the ability to produce records of original value, improvements, insurance recovery, and residual value will be essential in calculating the deductible amount.

Investment in property management software or professional bookkeeping services may be worthwhile in preparation for the potential reinstatement of deductions.

Evaluate Casualty and Theft Insurance

The deductibility of business losses under current law offers a degree of relief. However, with a possible expansion of those deductions in 2026, businesses should reexamine insurance policies for property, inventory, and cybercrime. Insurance that offsets physical loss or data breaches can act as a first line of defense while supporting future tax benefits.

Understanding policy exclusions and claim limits will further guide business decisions on loss mitigation and deduction planning.

Special Considerations for Landlords and Investors

Real estate investors and landlords can experience significant exposure to both theft and casualty loss. Damaged rental property, stolen appliances or HVAC units, and vandalism during vacancies are common risks.

These property owners should:

• Maintain detailed purchase and depreciation records
• Document maintenance schedules to demonstrate proper care
• Carry appropriate insurance including liability and property protection
• Monitor developments in local disaster declarations

When pre-2018 tax rules return, these individuals may see expanded deduction opportunities, particularly when losses exceed annual rental income.

Fraud Losses and Legal Resolutions

Another critical aspect of theft loss relates to financial fraud. Victims of scams, embezzlement, or breach of trust—such as in investment schemes—have previously relied on tax deductions to recover part of their losses. Under current law, these losses are not deductible unless linked to a federally declared disaster.

If deductions return in 2026, fraud victims may be eligible to claim their unrecovered amounts, provided they have pursued legal remedies, reported the crime, and can document the amount lost. Lawsuits and court judgments, police reports, and affidavits from financial institutions will be necessary to support such claims.

Taxpayers should also track any restitution payments received, as these may offset the deductible portion.

Possible Legislative Alternatives and Reforms

While the scheduled expiration of the Tax Cuts and Jobs Act provisions offers one possible future, Congress may also decide to:

• Extend the current restrictions past 2025
• Modify eligibility criteria for theft and casualty losses
• Introduce caps or new thresholds
• Adjust the standard deduction to offset losses indirectly

Depending on legislative direction, taxpayers may face either continued limitations or greater opportunities. Following proposed tax bills and staying connected with a qualified tax professional can help individuals and businesses anticipate and respond to changes.

Importance of Timely Filing and Amended Returns

If theft or casualty deductions are reinstated, taxpayers who experienced losses in the interim may wonder whether they can amend prior returns to claim deductions. Unfortunately, deductions for past losses typically must be claimed in the year the loss occurred.

However, there may be exceptions for losses discovered in a later year or where claims are part of an ongoing legal case. Monitoring IRS guidance will be essential in determining if retroactive relief becomes available.

In general, the three-year window for filing amended returns must be observed, which means time-sensitive planning is required for losses incurred near the tax law transition.

Conclusion

The landscape of tax deductions for theft and casualty losses has undergone significant change since the enactment of the Tax Cuts and Jobs Act in 2018. For individuals and many businesses, the once-available deductions have been largely suspended, with current relief only offered for losses directly tied to federally declared disasters. This shift has forced taxpayers to reassess how they manage risk, protect property, and plan for unexpected financial loss.

We explored the foundational aspects of theft and casualty losses—what qualifies, how the law has changed under TCJA, and why deductions that once provided financial relief are now significantly limited. Understanding these basics is essential, especially for those who have experienced losses and are unsure of their tax implications.

We delved deeper into the types of incidents that may still qualify for deductions, the critical role of federal disaster declarations, and how to document and report these events using IRS Form 4684. The complexity of today’s tax rules requires vigilance, accurate record-keeping, and often, professional guidance to ensure proper compliance.

Finally, we turned our attention toward the future. With the TCJA provisions set to expire after 2025, the possibility of a return to broader deductions offers hope for renewed financial relief. Both individuals and businesses can prepare by reviewing insurance coverage, maintaining detailed records, and understanding how pre-2018 tax rules might once again become applicable. Strategic planning now could lead to meaningful deductions later, especially for those in high-risk areas or industries.

Regardless of future legislative outcomes, one thing remains clear: theft and casualty loss events can create financial and emotional hardship. Being prepared—both practically and from a tax perspective—empowers taxpayers to minimize damage, maximize recovery, and build resilience. With thoughtful planning and up-to-date knowledge, individuals and businesses can better navigate the evolving tax environment and protect themselves against the unexpected.