New Casualty Loss Rules Under TCJA
When natural disaster strikes, it is of primary importance you ensure your family and loved ones are safe. As you rebuild and recover afterwards, you might face insurance claims and personal loss deductions for the first time. In the wake of Hurricane Florence and other natural disasters that may come our way, it is important to know the latest tax rules for claiming the loss of personal property. The Tax Cuts and Jobs Act (“TCJA”) changes the way personal casualty and theft loss are handled.
Prior to the TCJA, you could claim itemized deductions for personal casualty losses that were not compensated by insurance, including losses from storms, theft, fire, or other incidences. Now, for tax years 2018 through 2025, the personal casualty and theft loss deduction is only available in the cases of natural disaster – and only for taxpayers with property in a federally declared disaster area.
If you have been affected by a natural disaster in a federally declared disaster area, you can claim an itemized deduction for your personal casualty loss. These itemized deductions are subject to a $100 per casualty threshold, 10% of adjusted gross income limitation, and may be offset against personal casualty gains, if any.
How Can You Get the Most Value When You Deduct Casualty Losses?
The first step is to determine if you or your business is in a federally declared disaster area. If you are within the designated disaster area, you can start looking at your options for deducting your disaster losses.
The next step is to add up the amount of your losses. You must determine the value of your losses not just for tax purposes but to file insurance and FEMA claims, too. Once you have valued your losses, you can start to calculate the amount that is deductible on your tax return. That amount is generally calculated by figuring out the decrease in fair market value or your adjusted basis in the lost or damaged property (whichever is less), minus any recovery amount you expect to receive from insurance, FEMA, or other similar reimbursement sources.
Your deductible loss on personal use property, such as a home, boat or car not used in a business, is reported as an itemized deduction. These losses are subject to various limitations, which are generally based on your income.
If the amount you recover from insurance, FEMA and other sources is ultimately different from the amount you anticipated, you will report the difference either as income or as an expense in the year when the amount of reimbursement is finally determined.
In the case of a federally declared natural disaster, you have the option to deduct your losses in the tax year when the disaster occurs or in the tax year before the loss occurs. You have six months after the tax filing due date for the year of your loss to decide what year you want to claim the deduction in.
If you are in a federally declared disaster area, then you want to compare what your tax returns will look like depending on whether you claim your losses in the year before or the year of the disaster. Whichever year you choose, you must claim your entire loss in one year. You cannot divide up your expected loss and apply it across both years. But if the loss eliminates your taxable income for either year, make sure to consider the tax benefit of generating a net operating loss.
TCJA has changed the reporting rules for personal losses. Deductions are now limited to claiming an itemized deduction for losses occurring in a federally declared natural disaster. When you and your family are safe from the disaster, take time to review your assets and the damages the hurricane may have caused. Determine the value of what you lost and track quotes and claims for reimbursements and tax reporting purposes.
Our dedicated team of tax experts at Cherry Bekaert can explain the details of these changes specific to your situation and help you determine which actions are best. Contact one of our tax representatives to help you sort out your plan in this turbulent time.