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TCJA Limits Personal Casualty Losses

July 16, 2019

The Tax Cuts and Jobs Act (TCJA) made major changes to what taxpayers are able to claim as itemized deductions, including personal casualty and theft losses. Learn more about what has changed for 2019 and beyond.

The U.S. has endured a myriad of natural disasters in the last year alone. For years, Congress has responded to the devastating impacts of these natural disasters with tax relief for victims…but the Tax Cuts and Jobs Act has limited this. Read on.

What does the IRS consider a casualty?

Under Internal Revenue Code (IRC) section 165(c)(3) a casualty in defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Examples include: earthquakes, car accidents, fires, floods, terrorist attacks, hurricanes, and tornadoes.

Prior law

Prior law held that an individual could claim personal casualty losses (not compensated by insurance or otherwise) as itemized deductions. This included losses arising from fire, storm, shipwreck and theft.

There were two limitations to qualify:

  1. A loss had to exceed $100
  2. Aggregate losses could be deducted only to the extent they exceeded 10% of AGI (adjusted gross income)

TCJA changes

The TCJA changes this so that the only time an individual can deduct personal casualty losses is in the case of a federally declared disaster (FDD). A disaster is deemed a FDD by the President based upon the need for aid under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This limitation will apply to any loss arising from tax years beginning after December 31st, 2017 and before January 1st, 2026.

In the case of a FDD, you have the option to deduct your losses in the year the disaster occurs or in the tax year before the loss occurs. After the tax filing due date for the year of your loss, you have six months to decide what year you wish to claim the deduction in.

Unfortunately this means that taxpayers suffering casualty losses from events not deemed FDDs (flooding, fires, theft, local storms) will be responsible for the entire cost of damages, a change that has understandably been met with disapproval.

Are there alternatives?

Your financial advisor can help you find a solution that works best for you however, it might behoove you to revisit your homeowner, flood and auto insurance policies to determine if you want additional protection.

When disaster strikes, recovery can be painful and daunting. We’re here to help you make the most cost effective decisions for you, your family and your business. Need help assessing the impact of the TCJA? Contact any member of our Tax Services Group.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.

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