One casualty of the December 2017 federal tax law was the personal casualty and theft loss deduction (section 165 of the internal revenue code). With a few exceptions, as of January 1, 2018, nonbusiness losses from sudden, unexpected, or unusual events are no longer deductible as itemized deductions on your federal income tax return.
“Sudden, unexpected, or unusual” events include fire, storm, shipwreck, and theft. In prior years, you determined your deduction by figuring out the adjusted basis of your property before the casualty. You also calculated the decrease in fair market value of your property as a result of the casualty.
Then you took the lesser of those two numbers, subtracted insurance and other reimbursements (both actual and expected), any salvage value, and $100. Next, you reduced your deduction by 10% of your adjusted gross income.
If the property was insured, you had to file an insurance claim in order to get a tax deduction, and you could only claim a deduction if you itemized on your federal income tax return.
Why do you care about the old rules? A good reason: Even though personal casualty losses are generally not deductible beginning with 2018 tax returns, the former rules are still in effect.
That’s because the new law includes exceptions. If you qualify for an exception, you apply the old rules to calculate your deductible loss during tax years 2018 through 2025.
What are the exceptions? One is when your loss happens during a federally declared disaster. In that case, losses are still deductible and can still be claimed on your current or prior year federal income tax return.
Here are questions about the new rules.
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Insurance coverage is one area to review. Consider your existing amount of coverage, as well as exclusions and endorsements on your homeowners, auto, and flood insurance policies.
Recordkeeping is another non-tax financial planning task related to casualty losses. Though you generally can’t deduct personal casualty losses after 2018, casualty gains can still be taxable. Personal casualty losses can offset those gains, assuming you have the records to prove the loss.
401k rules allow for “hardship” distributions of elective deferrals prior to age 59-1/2. One of the safe-harbor hardship exceptions allows distributions for “expenses relating to the repair of damage to an employee’s principal residence that would qualify for the casualty deduction under internal revenue code section 165.”
The elimination of the personal casualty loss deduction is part of internal revenue code section 165.
According to the American Institute of Certified Public Accountants, the specific reference to section 165 in the 401k rules means 401k participants no longer have access to this hardship distribution safe harbor.
The home office deduction could include casualty losses and could be claimed by both self-employed taxpayers and employees.
Employees who worked from home and qualified for a home office deduction claimed it on Schedule A of federal income tax returns as a miscellaneous itemized deduction. The December 2017 tax law eliminated miscellaneous itemized deductions, so employees will no longer benefit from home office expenses, including casualty losses.
Self-employed taxpayers claim the home office deduction on Schedule C, Profit or Loss from Business. The new rules did not change the deduction for self-employed taxpayers.