December 17, 2018

Personal Casualty and Theft Loss Tax Deduction: Significant Change Beginning January 1, 2018

The Tax Cuts and Jobs Act of 2017 included a significant change to the tax deductibility of personal casualty and theft losses.  If you incurred such losses in 2018, and planned on deducting losses on your individual income tax return, you may be in for an unpleasant surprise.

Individual Income Tax Preparation

Personal Casualty and Theft Loss Tax Deduction


Prior to 2018, with certain limitations, significant personal casualty and theft losses could be treated as an itemized deduction on individual income tax returns.  A casualty loss is a loss due to a sudden unexpected and unusual event such as a fire or flood.  Progressive events such as termite damage and dry rot are not considered casualty losses.  Limitations included (1) the loss must not have been covered by insurance or other financial reimbursement, (2) the amount of loss must be greater than $100, and (3) the amount of loss must be larger than 10% of your adjusted gross income. 

Beginning January 1, 2018, new ... and very significant ... limitations came into law regarding the treatment of casualty and theft losses.  The prior limitations above still apply.  However, beginning January 1, 2018l, in order for this loss to be deductible, the loss must now occur in a federally declared disaster area.

Not in a federally declared disaster area?  You're screwed!

For instance, say your home sustains flood damage not covered by insurance, but the home does not reside in a federally declared disaster area.  You're out of luck, no casualty deduction.  Say you have jewelry stolen that is not covered by insurance, but the theft does not occur in a federally declared disaster area.  Once again, you're out of luck, no casualty deduction.

And one other thing ... If you take the standard deduction on your income tax return, a personal casualty and theft loss tax deduction is not available to you, regardless of the circumstances.

Nothing like kicking a person when the person is already down, huh?

Questions about individual income taxes?
Questions about casualty and theft losses?
About Mary Rae Fouts, EA

Mary Rae Fouts, EA provides tax, insurance consulting, and expert witness services to clients throughout the United States.  For more information visit FoutsFinancialGroup.com.

3 comments:

  1. Ripoff! I wonder how many expensive items will be 'stolen' in disaster areas. And quietly 'found' a year later.

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  2. Can I carry the loss back to an earlier year and file a new tax return to take the loss in that year?

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    Replies
    1. Good question. There is a provision in the current tax code that allows for a casualty loss to be taken in the immediately preceding year by filing an amended tax return as you suggest. One big catch, however: the loss must occur in a federally declared disaster area.

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