Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.
A casualty loss occurs when there is property damage from a sudden, unanticipated event, not from gradual, progressive damage. Examples of events qualifying as a casualty include: acts of nature like hurricanes, tornadoes, floods, storms, and volcanic eruptions; shipwrecks; sonic booms; vandalism; fires; car accidents; theft; and terrorist attacks.
For tax years 2018 through 2025, the Act has suspended the itemized deduction for personal casualty and theft losses. Prior to this change in law, personal casualty or theft losses were only deductible to the extent they exceeded $100 per casualty or theft event. In addition, the aggregate net casualty and theft losses for the year were deductible by those who itemized their deductions but only to the extent that the loss exceeded 10% of an individual’s adjusted gross income (AGI).
There is an exception to the suspension, in which a taxpayer has a gain as a result of another casualty (the insurance or other reimbursement is more than the loss), in which case the loss would be allowed to the extent of another casualty gain.
The Act did, however, retain a deduction for qualified disaster-related personal casualty losses for years 2018 through 2025. A qualified disaster-related personal casualty loss is one that occurs in a presidentially declared disaster area and is a result of the disaster.
For example, if your home was destroyed by a hurricane within an area the president has declared to be a disaster area and you have a casualty loss, you are able to deduct the loss. However, if your home is destroyed by a fire that was not in a disaster area (say, due to a fire that started in your kitchen when cooking), you cannot claim a casualty loss, even though your loss would be as great as that of the individual residing in the disaster zone.
In light of these changes, you may not qualify for any tax relief as the result of a casualty, and you are cautioned to review your risks for a casualty and your insurance coverage, should you be unfortunate enough to incur a non-deductible casualty loss. Because of inflation, make sure you are not underinsured.
If you have questions related to casualty losses, please give us a call.