Unforeseen disasters happen all the time and they may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But there are new restrictions that make these casualty loss deductions much more difficult to take.

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, or fire; an accident or act of vandalism; or even a terrorist attack.

Unfavorable changes for casualty loss deductions

TCJA made changes for losses incurred in 2018 through 2025.  Generally eliminated are personal casualty loss deductions, except for losses due to federally declared disasters. During 2019, there were presidential declarations of major disasters in parts of Iowa and Nebraska after severe storms and flooding. So victims there would be eligible for casualty loss deductions.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. What if you have personal casualty gains because your insurance proceeds exceed the tax basis of the impaired property? You can deduct personal casualty losses that aren’t due to a federally declared disaster against them.

Special timing election for casualty loss deductions

Casualty losses due to a federally declared disaster, are afforded a special election.  This elections allows you to deduct the loss on your tax return for the preceding year. If you’ve already filed your return for the preceding year, not to worry.  You can file an amended return to make the election and claim the deduction in the earlier year. This can help you get extra cash when you need it.

This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating personal losses

To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, follow theses three steps:

1. Subtract any insurance proceeds.
2. Subtract $100 per casualty event.
3. Add Items 1 and 2, then subtract 10% of your AGI for the year you claim the loss deduction.

Important: Another factor to consider is that casualty loss are itemized deductions.

For 2018 through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2019, they are $12,200 for single filers, $18,350 for heads of households, and $24,400 for married joint-filing couples.

So even if you otherwise qualify for a casualty deduction, you still might not get any tax benefit!

I can help

These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. If you have disaster-related losses, I can help you navigate the complex rules.

(This is Blog Post #551)