Background

Last year, we had Hurricanes Harvey, Irma, and Maria and destructive wildfires in California. This year, we’ve had Hurricanes Florence and Michael and more California wildfires. These events resulted in deaths and billions in property damage.

The Tax Cuts and Jobs Act (TCJA) places a new restriction on personal casualty loss deductions for 2018–2025. Here’s what you need to know about the current rules for personal casualty losses, along with special rules for some 2016 and 2017 disaster- related losses.

Personal Casualty Loss Basics

The IRS tax code potentially allows individuals to claim federal income tax deductions for casualty losses to personal-use property. In this context, the word casualty means damage or destruction of property resulting from an identifiable event that is sudden and unexpected. For purposes of this update, we are talking about disaster-related casualties from hurricanes, tornadoes, storms, floods, fires, earthquakes, and the like. For losses to be deductible, the damage from such disasters must be permanent and not merely result in a temporary decline in value.

Unfavorable TCJA Change for Personal Casualty Losses Incurred in 2018–2025

For losses incurred in 2018–2025, the Tax Cuts and Jobs Act generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters.

Net Operating Losses (NOLs) from Personal Casualty Losses

Deductible personal casualty losses are allowed in determining whether an individual has a Net operating Loss (NOL) for the year. Under pre-Tax Cuts and Jobs Act law, a Net Operating Loss could be carried back to earlier tax years. The Tax Cuts and Jobs Act disallows carrybacks of Net Operating Losses arising in tax years ending after 2017, but Net Operating Losses arising in those years can be carried forward indefinitely. Also, for Net operating losses arising in tax years beginning after 2017, the Net operating loss carried forward cannot offset more than 80% of taxable income in the carryforward year.

Effect of Insurance Proceeds

Once the amount of a casualty loss is determined, it must be reduced by expected proceeds from casualty insurance. Expected insurance proceeds reduce the casualty loss amount dollar for dollar. When the property is covered by insurance, but no claim is filed, no deduction is allowed for the portion of the loss that would otherwise be covered by insurance.

If your are uncertain about the amount of the insurance reimbursement that will be received, that part of the loss should not be deducted until you are reasonably certain that no further reimbursement will be received. When an insurance reimbursement is expected but has not yet been received by the time your federal income tax return for the casualty event year is filed, the expected reimbursement must still be considered in calculating the amount of your deductible casualty loss.

When and How to Claim Personal Casualty Loss Deductions

In general, personal casualty losses are deductible in the year during which the casualty event occurs. However, when insurance reimbursements are anticipated, the loss should be reported in the year when you can reasonably determine that no additional reimbursements are forthcoming.

Special Breaks for Personal Casualty Losses from 2016 and 2017 Federally Declared Disasters

Legislation enacted in 2017 and 2018 provides special rules for personal losses incurred in specified disasters. The special rules are summarized below.

Losses Arising from 2016 Disasters. A change included in the Tax Cuts and Jobs Act stipulates that the 10%-of-Adjusted gross income personal casualty loss deduction threshold does not apply to losses recognized in 2016 and 2017 arising from 2016 federally declared disasters. Instead, the loss must be reduced by only $500. Clients that don’t take itemized deductions can increase their standard deduction by the allowable loss. 2016 returns can be amended to take advantage of this relief.

Losses Arising from 2017 California Wildfires. Victims of certain California wildfires were given tax relief by the Bipartisan Budget Act of 2018 (Budget Act). For qualifying personal casualty losses, the 10%-of-Adjusted gross income deduction threshold is eliminated. Instead, the loss must be reduced by only $500. Non-itemizers can increase their standard deduction by the allowable loss. To be eligible for this relief, the loss must have occurred on or after 10/8/17 in the California wildfire disaster area.