How is the deductible portion of casualty and theft loss computed?

The deductible portion of casualty and theft losses is calculated based on the amount that exceeds 10% of the taxpayer’s adjusted gross income (AGI). This rule was established to provide some relief for taxpayers who experience significant financial distress due to these types of losses, while also imposing a threshold to reduce the impact of smaller losses that may not have a substantial financial effect on the taxpayer.

In practical terms, when a taxpayer experiences a casualty or theft loss, they first determine the total loss amount for the event, then subtract any relevant insurance reimbursements. Afterward, they will subtract 10% of their AGI from that net loss amount to determine the deductible portion. This means that only substantial losses that significantly affect their financial situation are eligible for deduction.

Other options do not reflect the tax regulations surrounding casualty and theft losses. Simply deducting the total value of all losses without considering AGI would not align with the tax code's provisions, similarly to the idea that all losses are deductible without limits. The option that suggests losses should be deducted in equal annual installments does not conform to how these specific deductions are calculated, as they are typically deducted in the year the loss occurred.