Federally Declared Disaster designation laws and TCJA of 2017 make claiming casualty loss tax deductions impossible for some victims of fire, flood, tornado, and other losses. Many property owners will be left without casualty loss tax deductions unless the loss was associated with a Federally Declared Disaster event.
What is a Federally Declared Disaster casualty loss?
The enactment of TCJA of 2017 changed the general definition of a qualified casualty and theft loss relating to your home, household items, and vehicles. These losses must be associated to an event designated as a Federally Declared Disaster by the President. An FDD casualty doesn’t include normal wear and tear or progressive deterioration. Qualifying FDD events could include acts of nature like hurricanes, tornadoes, floods, storms, and volcanic eruptions; shipwrecks; sonic booms; vandalism; fires; car accidents; theft; and terrorist attacks.
The IRS states:
A disaster loss is a loss that occurred in an area determined by the President of the United States to warrant assistance by the federal government under the Stafford Act and that is attributable to a federally declared disaster. Disaster areas include areas warranting public or individual assistance (or both). A federally declared disaster includes a major disaster or emergency declaration.
What changes result from the Tax Cuts and Jobs Act?
The TCJA ended what once was a pretty general definition of casualty losses. For tax years 2018 through 2025, you can only deduct casualty and theft losses if they’re brought about due to an event that’s been designated a Federally Declared Disaster by the President, (Sec. 165(h)(5)). The President makes the disaster a Federally Declared Disaster by determining that the area warrants assistance by the federal government.
Prior to this change in law, personal casualty or theft losses were deductible, but only to the extent they exceeded $100 per casualty or theft event. In addition, the aggregate net casualty and theft losses for the year were deductible by those who itemized their deductions but only to the extent that the loss exceeded 10% of an individual’s adjusted gross income (AGI).
The exception to this suspension is if a taxpayer has a gain as a result of another casualty (the insurance or other reimbursement is more than the loss), in which case the loss would be allowed to the extent of another casualty gain.
Other less-obvious changes relating to losses
Putting all this into more simple language reveals some facts that many people may not be aware of until they experience a casualty or theft loss. Some examples include situations such as these:
- Your home is destroyed by a kitchen fire. Under TCJA, you cannot claim a casualty loss, even though your loss would be as great as that of a person whose home was destroyed in a Federally Declared Disaster event.
- A thief breaks into your garage and makes off with your classic ’57 Chevy. Before TCJA, you might have had a theft loss deduction. After TCJA, the only way this theft might be a qualifying loss would be if it were related to and in an FDD.
- Did you lose or mislay something? Not tax-deductible before or after TCJA. Maybe before TCJA if it happened as the result of a sudden, unexpected, and unusual event. The IRS gave an example of such a casualty loss that would qualify before TCJA: “A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond is a casualty.”
- If you have any type infestation, it’s unlikely to qualify under TCJA laws because it wouldn’t meet the rule that the President must declare the situation to be a Federally Declared Disaster.
- Remember, you can’t claim the FDD deduction if you file your taxes claiming your filing status as standard deduction. You must itemize.
IRS issues press release June 11, 2019
AR-2019-01, June 11, 2019
Arkansas — Victims of the severe storms and flooding that took place on May 21, 2019 in Arkansas may qualify for tax relief from the Internal Revenue Service.
The President has declared that a major disaster occurred in the State of Arkansas. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in certain areas will receive tax relief.
Individuals who reside or have a business in Conway, Crawford, Faulkner, Jefferson, Perry, Pulaski, Sebastian, and Yell counties may qualify for tax relief.
Protect yourself and your property
Nobody wants to incur a casualty loss or go through the devastation and destruction of an event that is ultimately designated as a Federally Declared Disaster. FEMA urges those suffering casualty due to an FDD event to follow instructions and report damage immediately.
More responsibility for recovery loss is now being put on the individual, and proper insurance coverage is vital. With these tax changes, you may not qualify for any tax relief as a result of casualty or theft. I strongly urge you have a serious conversation with your insurance provider to review your risks for casualty.
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