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Personal Casualty Losses: What’s Deductible?

June 15, 2023

When claiming personal casualty loss deductions for federally declared disasters, a special rule allows you to claim a deduction. Read on.

Personal casualty losses became more difficult to qualify for under the Tax Cuts and Jobs Act (TCJA). Through 2025, deductions for casualty losses related to personal property are generally eliminated, except for losses due to federally declared disasters.

But there’s an important exception to the general rule: If the insurance proceeds you receive exceed the tax basis of the damaged or destroyed property, you’ll have a personal casualty gain. In this situation, you’re allowed to deduct personal casualty losses that are not from a federally declared disaster up to the amount of your personal casualty gain.

First off—what is considered a federally declared disaster?

A federally declared disaster is a disaster or other situation for which a presidential declaration of major disaster is issued. You can find a listing of federally declared disasters here:

Calculating Losses

In general, to qualify for a personal casualty loss deduction under the current tax rules, you must meet the following eligibility requirements:

  • The loss must be due to a federally declared disaster, and
  • You must itemize deductions on your federal income tax return.

When calculating the deduction, you’ll need to subtract:

  • Any insurance proceeds,
  • $100, and
  • 10% of your adjusted gross income (AGI).

For example, suppose you incur an unreimbursed $100,000 personal casualty loss due to flood damage in a federally declared disaster area. If your AGI for 2023 is $300,000, your itemized deduction for the loss is only $69,900 ($100,000 minus $100 minus 10% of $300,000). Another way to look at things: You must incur more than $30,100 in unreimbursed losses from a federally declared disaster to take a deduction ($100 plus 10% of $300,000). In addition, you won’t be able to deduct losses unless you itemize. The standard deduction amounts for 2023 are:

  • $13,850 for single filers (up from $12,950 in 2022),
  • $20,800 for heads of households (up from $19,400 in 2022), and
  • $27,700 for married joint-filing couples (up from $25,900 in 2022).

If the standard deduction exceeds your total itemized deductions (including any personal casualty loss deductions) for that tax year, it doesn’t make sense for you to itemize.

Timing Your Deduction

When claiming personal casualty loss deductions for federally declared disasters, a special rule allows you to claim a deduction on:

  • Your tax return for the year the casualty event happens, or
  • An original or amended return for the year before the casualty event.

Depending on your situation, it may be advantageous to claim a loss in an earlier year. Factors that can affect your decision include:

  • Your income level in the year of the loss vs. the prior year, and
  • Whether you itemize deductions in the year of the loss vs. the prior year.

In addition, by claiming the loss on the prior year’s return, you’ll receive the tax benefit sooner than if you wait until you file the current year’s return sometime next year.

Note: You can file an amended return to make the election and claim the deduction in the preceding year. However, the amended return must be filed within six months of the filing date (excluding extensions) for the tax year in which the disaster occurred.

Temporary Change

The limitations on personal casualty losses under the TCJA are set to expire at the end of 2025, unless Congress extends them. Pre-TCJA rules allowed taxpayers to claim itemized deductions for personal casualty losses regardless of whether the loss was due to a federally declared disaster. For example, the old rules allowed you to claim itemized deductions for unreimbursed losses due to an auto accident or burst water pipes in your home during a severe cold snap.

If Congress allows this TCJA provision to expire, more people will qualify for these deductions. However, under pre-TCJA rules, unreimbursed personal casualty losses will still be subject to the $100-per-event reduction and the limit based on 10% of AGI.

For more details on the tax rules for personal casualty losses, contact our Tax Services team.

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