When is a Disaster a Tax Deduction?

It’s not your imagination--we are experiencing more weather and climate disasters than ever before. According to the website www.climate.gov, in 2017, “the U.S. experienced a historic year of weather and climate disasters. In total, the U.S. was impacted by 16 separate billion-dollar disaster events.” These included tornadoes, floods, wildfires, hurricanes, etc.

With all of the related casualty losses caused by these natural disasters, you probably wonder when losses caused by catastrophic events are deductible on your personal income tax return. As with most deductions beginning in 2018, there are changes to what had been long-standing rules.

As a refresher, before the Tax Cuts and Jobs Act (TCJA) passed in December, 2017, a deductible casualty loss was damage to, destruction of or loss of property resulting from an identifiable event that was sudden, unexpected or unusual. Often times, these losses were weather-related, but they could also have been from accidents, fires, theft, etc.

In tax years prior to 2018, taxpayers were able to deduct uncompensated personal casualty losses of the lesser of:

a. adjusted basis in the property right before the loss event, or
b. decrease in fair market value (FMV) of the property as a result of the loss event

The casualty loss amount was always net of any insurance reimbursement that was received or expected to be received.

A further limitation was applied to the overall loss amount so that the final deduction amount, as shown above, was reduced by

a. $100 per casualty or theft event, and
b. 10% of Adjusted Gross Income (AGI)

These losses were reported on Form 4684, which would be attached to a taxpayer’s individual income tax return. The process, as described, was rather cumbersome and the limitations often proved to be too great (especially the 10% of AGI floor) for much in the way of allowable deductions.

To ease this burden placed on taxpayers, the IRS issued two Revenue Procedures (Rev. Proc. 2018-8 and 2018-9) in early 2018 that offered some relief from the long-established process of reporting casualty losses. Rev. Proc. 2018-8 put in place safe harbors along with de minimis methods to compute casualty damage amounts to personal-use residences. Rev. Proc. 2018-9 dealt only with areas in southern states that had damage resulting from one of the three 2017 hurricanes (Harvey, Irma, and Maria). Prior to the end of 2017, the 10% of AGI limitation had been lifted for losses from those three hurricanes to further ease the burden those weather-related events had placed on U.S. taxpayers.

Fast forward to December 22, 2017, when President Trump signed the Tax Cuts and Jobs Act into law, which significantly curtailed personal casualty losses for the tax years 2018 through 2025. The definition of a loss hasn’t changed; however, the TCJA includes language clarifying that personal casualty losses are deductible only when they are attributable to a federally declared disaster. FEMA provides a website (https://www.fema.gov/disasters) which lists 92 federally declared disasters for 2018, through the date of this article.

Thus, a casualty loss resulting from the torrential rains/floods/landslides that were experienced in Southwestern Pennsylvania in the months of July through September are not eligible to be deducted, since these events were not labeled/declared a federal disaster. Recently, a client contacted Schneider Downs regarding extensive losses sustained in their family home as a result of flooding. Those losses were, sadly, not covered by their homeowner’s policy. We had the unfortunate task of explaining the new casualty loss regime, which provides no relief to those particular taxpayers.

In conclusion, you might want to review your home and auto insurance policies, because the final safety net of a tax deduction will most likely not be available to most taxpayers.

With all the changes enacted by the Tax Cuts and Jobs Act, you may wish to discuss matters related to this topic – or any others – with your Schneider Downs & Co. team. Please feel free to reach out with any questions. We are available to assist you.