Under current tax law, individual taxpayers are not permitted to deduct casualty losses from catastrophic events like Hurricane Ida, wildfires and floods…right? Wrong. Although recent legislation has tightened the rules, you may still claim deductions, within certain limits, for losses incurred in a federally designated disaster area.
Following are the answers to some frequently asked questions (FAQs) about write-offs for personal casualty losses.
What were the previous rules for casualty losses?
Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, you could deduct losses to personal property that were caused by a “sudden, unexpected or unusual” event. Typically, this included damage or destruction from natural disasters, but also applied to, say, an automobile collision or water pipes bursting during a winter freeze.
What were the key limits?
The amount of deductible loss, which was reduced by any insurance reimbursements you received, was further limited by these two rules.
- Only the excess above 10% of your adjusted gross income (AGI) was deductible.
- The amount of the loss had to be reduced by $100 for each event.
For instance, if your AGI was $100,000 and you incurred one $20,000 unreimbursed loss, your deduction was $9,900.
How do you figure out the deductible amount?
It is equal to the lesser of (1) your adjusted basis of your property or (2) the decrease in fair market value of your property resulting from the casualty. For income-producing property (e.g., rental real estate) that is completely destroyed, the amount of the loss is limited to your adjusted basis in the property
What are the current rules for casualty losses?
The TCJA generally suspends the casualty loss deduction for 2018 through 2025, but there is an exception for losses in a federally designated disaster area. In this case, you may still deduct casualty losses to personal property, subject to the prevailing limits.
What are the limits for 2021?
In the years following the TCJA, Congress temporarily tweaked some of the rules. For instance, it eliminated the usual 10%-of-AGI limit, while increasing the reduction floor from $100 to $500 for certain disaster-area losses incurred in 2020. However, the usual limits generally apply for losses incurred in 2021, absent any further legislation.
When do you claim the casualty loss deduction?
Generally, the loss is claimed on the tax return for the year in which the casualty occurred. However, a special election is available for losses in a federally designated disaster area: You can choose to deduct the loss on the tax return for the year preceding the actual event.
For example, if you suffer a loss during hurricane season in 2021, you do not have to wait until you file your 2021 return. Instead, you can obtain faster relief by filing an amended 2020 return or, if you have an automatic filing extension, by claiming the loss on the 2020 return due by October 15, 2021. Similarly, for a loss incurred early in 2022, you may claim the loss on the 2021 return due by April 15, 2022.
Do you have any more questions? Contact your JMF professional tax advisor regarding your personal situation.