The Tax Cut and Jobs Act (TCJA) of 2017 had a big impact on tax breaks and what’s available to reduce your federal tax bill.
One of the biggest of these changes relates to the Casualty Loss Deduction, often a critical source of tax relief for those suffering property losses resulting from hurricanes, tornadoes, fires and other natural disasters.
Read on to learn how TCJA affected the Casualty Loss Deduction and what you’ll need to claim disaster-related losses on your 2020 taxes.
What is the Casualty Loss Deduction?
Prior to 2018, the Casualty Loss Deduction allowed taxpayers to deduct a wide range of uninsured casualty losses on their federal tax return, including damages resulting from earthquakes, fires, floods, vandalism, theft, terrorism and other similar disasters. But passage of TCJA brought with it significant changes to the deduction, putting tighter limits on which theft and casualty losses qualify as potential tax breaks for disaster victims through the 2025 tax year.
Now, and through 2025, you may only claim casualty losses incurred due to a federally declared disaster (officially declared by the U.S. President). Of course, you must also itemize your return to access the casualty loss deduction, making the standard deduction unavailable.
Currently, there are two types of disaster declarations qualifying for the casualty loss deduction:
Generally, emergency declarations are made at the request of a state governor and when the President determines federal assistance is required.
Major disaster declaration
Major disaster declarations are typically declared by the President when a natural event has caused damage determined beyond the capabilities of local and state governments to adequately respond. The President has the power to declare a disaster area and make it eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
Such disasters include:
- Volcanic eruptions
- Tidal waves
- And more*
*To find a current list of federally declared disasters, click here.
If you incurred losses due to a recent federally declared disaster but failed to declare those losses on a past return, you may still do so by filing an amended return (going back up to three tax years).
What qualifies as a casualty loss deduction?
According to the IRS, any damage, destruction or total loss of personal property resulting from a federally declared disaster and not covered by insurance may be claimed on your tax return, given that the damage occurred during the tax year you’re filing. Damage caused by general wear and tear or progressive deterioration (damage occurring during an extended period of time) are not eligible for the disaster tax break as they don’t result from sudden, unexpected and unusual events (i.e. natural disasters).
So, if a hurricane or flood caused damage to your home in 2019, and part of that damage is covered by your homeowner’s policy, you may only deduct losses on your 2019 income tax return for the portion not reimbursed by insurance. Additionally, if your losses are fully covered by insurance, you’ll be unable to claim the deduction at all.
What are the limits on disaster-related tax breaks?
TCJA tightened the limits on the amount of casualty losses you can deduct on your federal tax return.
Between 2018 and 2025, you may only claim the casualty loss deduction when:
- Damages took place due to a federally declared disaster,
- The losses you incurred are not covered by insurance, and
- The total amount of casualty losses for the tax year exceed 10% of your adjusted gross income (AGI).
Additionally, you must also subtract $100 from each loss before taking the deduction. This applies to each casualty you’ve incurred during the year.
Let’s put these requirements in perspective. Say you experienced $20,000 of uninsured damage to your home in 2019. This damage was the result of a flood in a federally declared disaster area. Because you made $60,000 in Adjusted Gross Income for the year, you may only deduct the amount of damage exceeding $6,000 ($60,000 x 10% = $6,000).
To determine your deductible losses in this scenario, calculate your total loss ($20,000 - $100 = $19,900) and subtract the 10% AGI threshold ($6,000) from that total. In this case, you could likely claim a total of $13,900 ($19,900 - $6,000) on this year’s return.
Do theft losses qualify for the deduction?
Much like casualty losses, theft losses can only be claimed as a 2020 tax break when they 1) are uninsured, and 2) directly relate to a disaster area declaration. Per the IRS, the removal of property must also “be illegal under the law of the state where it occurred and must have been done with criminal intent.”
For instance, if you store your car in a garage, but the car was stolen due to disaster-related damage to that building, you could possibly argue the loss from that theft to be tax deductible.
How do I claim a casualty loss deduction?
If you qualify for the casualty loss deduction, you will first need to calculate and report casualties incurred for the year on Form 4684. Once you’ve determined your deductible losses, you can claim casualty and theft losses on Schedule A (Form 1040 or 1040-SR) of your 2019 return.
When claiming casualty loss tax breaks, be sure to maintain all records and documents of your losses.
These may include:
- Documents proving ownership of every asset you’re claiming as damaged, destroyed or stolen (receipts, deeds, etc.).
- Receipts or contracts showing each item’s original cost, as well as any subsequent improvements.
- Records clearly listing each property’s fair market value, including appraisals, insurance records, and cost-of-repair receipts.
What’s the next step?
Claiming a casualty loss on your 2020 return?
We can help.
At Liberty Tax®, our tax prep professionals provide the guidance, tools and expertise you need to capitalize on tax breaks, minimize your tax bill and complete your return before the 2020 deadline.
To learn more, stop by your local Liberty Tax® office today.