Casualty losses include damages from natural disasters such as hurricanes, tornadoes, fires, earthquakes, volcanoes, etc. The casualty and theft loss deduction previously covered a broad spectrum of circumstances, but the rules changed when the Tax Cuts and Jobs Act (TCJA) was implemented. The TCJA eliminated casualty loss deductions for 2018 through 2025, except for losses sustained in a specifically-designated federal disaster area. The TCJA limitation is scheduled to expire at the end of 2025, so taxpayers may be able to deduct other casualty losses that occur after 2025.
A federally-declared disaster is a disaster that takes place in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A list of locations warranting public or individual assistance (or both) is available at the Federal Emergency Management Agency (FEMA) website at www.fema.gov.
The calculation of the amount of the casualty includes several steps, such as determining the adjusted basis in the property before the casualty, evaluating the decrease in fair market value of the property as a result of the casualty, and subtracting any insurance proceeds or other federal or state assistance received or expected to be received from the smaller of the adjusted basis or decrease in fair market value of the property. Additionally, only the excess above 10% of adjusted gross income (AGI) can be deducted on the tax return and the amount of the loss should be reduced by $100 for each separate casualty or theft loss event.
Theft and casualty losses are first reported and calculated on Form 4684 and ultimately reflected on Schedule A along with all other itemized deductions.
Anyone who qualifies for a casualty loss deduction should keep all of the supporting evidence, paperwork, and accurate records in the event the IRS challenges the deduction. For more information on this topic, please contact a member of Withum’s professional team.