Prior to 2018, the Casualty Loss Deduction allowed taxpayers to deduct a wide range of uninsured casualty losses on their federal tax return, including damages resulting from earthquakes, fires, floods, vandalism, theft, terrorism and other similar disasters. Passage of TCJA brought with it significant changes to the deduction, putting tighter limits on which theft and casualty losses qualify as potential tax breaks for disaster victims through the 2025 tax year.
Now, and through 2025, you may only claim casualty losses incurred due to a federally declared disaster (officially declared by the U.S. President). Of course, you must also itemize your return to access the casualty loss deduction, making the standard deduction unavailable.
Theft and Casualty Losses
Personal casualty losses are deductible on your tax return as long as the property is located in a Presidentially-declared disaster area as long as:
1. The loss was caused by a sudden, unexplained, or unusual event.
Natural disasters such as flooding, hurricanes, tornadoes, and wildfires qualify as sudden, unexplained, or unusual events.
2. The damages were not covered by insurance.
You can only claim a deduction for casualty losses not covered or reimbursed by your insurance company. The catch here is that if you submit a claim to your insurance company late in the year, your claim could still be pending come tax time. If that happens, you can file an extension on your taxes.
3. Your losses were sufficient to overcome any reductions required by the IRS.
The IRS requires several "reductions" to claim casualty losses on your tax forms. The first is that you must subtract $100 from the total loss amount for each casualty event. This is referred to as the $100 loss limit.
Second, you must reduce the amount by 10 percent of your adjusted gross income (AGI) or adjusted gross income from the total casualty losses for the year. For example, Say you experienced $20,000 of uninsured damage to your home in 2020. This damage was the result of a flood in a federally declared disaster area. Because you made $60,000 in Adjusted Gross Income for the year, you may only deduct the amount of damage exceeding $6,000 ($60,000 x 10% = $6,000).
To determine your deductible losses in this scenario, calculate your total loss ($20,000 - $100 = $19,900) and subtract the 10% AGI threshold ($6,000) from that total. In this case, you could likely claim a total of $13,900 ($19,900 - $6,000) on this year’s return.
Claiming Disaster-related Casualty Losses
Affected taxpayers in a Presidential Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year on form 4684. Claiming the loss on an original (2021) or amended return for last year (2020) will get the taxpayer an earlier refund, but waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors. If you choose to deduct losses on your 2020 tax return, you have one year from the due date of the tax return to file.
When claiming casualty loss tax breaks, be sure to maintain all records and documents of your losses.
These may include:
Documents proving ownership of every asset you’re claiming as damaged, destroyed or stolen (receipts, deeds, etc.).
Receipts or contracts showing each item’s original cost, as well as any subsequent improvements.
Records clearly listing each property’s fair market value, including appraisals, insurance records, and cost-of-repair receipts.
Check out the IRS publication relating to Casualties, Disasters, and Thefts. IRS Publication Link
If you have any question about whether you qualify for tax relief after a recent natural disaster, please contact our accounting firm for assistance in figuring out the best way to handle casualty losses related to hurricanes and other natural disasters.
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