Under the Tax Cuts and Jobs Act, personal casualty losses are nondeductible unless attributable to a federally declared disaster.
Prior Law
Through December 31, 2017
Under the prior law, for individuals, losses of property not connected with a trade or business or a transaction entered into for profit were deductible as personal casualty losses if the losses were the result of fire, storm, shipwreck, or other casualty, or of theft.
Personal casualty or theft losses are deductible only to the extent that the losses or theft exceed $100 per casualty or theft loss. In addition, aggregate net casualty and theft losses are deductible only to the extent that the amount of the loss exceeds 10% of the individuals Adjusted Gross Income (AGI). The 10%-of-AGI threshold is applied after the per-casualty floor.
Personal Casualty Gains
A personal casualty gain is the recognized gain from any involuntary conversion of nonbusiness, not-for-profit property arising from fire, storm, shipwreck, or other casualty, or from theft, such as where the taxpayer receives an insurance payment or other reimbursement that exceeds the taxpayer’s adjusted basis in the destroyed, damaged, or stolen property.
If personal casualty losses exceed personal casualty gains for a tax year, the losses are allowed only to the extent of the sum of the amount of the personal casualty gains for the tax year, plus so much of the excess of personal casualty losses over personal casualty gains as exceeds 10% of the taxpayer’s AGI.
Federally Declared Disasters
A “federally declared disaster”–a term used for the election to claim a disaster loss in the preceding tax year and for other tax rules relating to disasters–is a disaster determined by the President to warrant federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
New Law
Effective for tax years beginning after December 31, 2017 and before January 1, 2026
Personal casualty and theft losses of an individual are deductible only to the extent they’re attributable to a federally declared disaster. The loss deduction is subject to the $100-per-casualty and 10%-of-AGI limitations described above.
The new law has also increased the per casualty floor from $100 to $500.
Commentary
Essentially, any and all losses can be used to offset any and all gains. Only losses under a federally declared disaster area can be deducted on Schedule A. The losses are limited to the first $500, then reduced by 10% of the AGI.
So, where an individual has both personal casualty gains and personal casualty losses for a tax year, the individual first reduces the amount of personal casualty gains by the amount of nonfederal casualty losses. Any remaining personal casualty gains are then used to reduce the amount of the taxpayer’s deductible federal disaster losses. Any remaining federal disaster losses are deductible to the extent they exceed the 10%-of-AGI floor.
