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How the TCJA Tax Reforms Hammer Personal Casualty Loss Deductions

The Tax Cuts and Jobs Act (TCJA) makes claiming a tax deduction for a personal casualty loss more difficult.

For losses incurred in 2018-2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters.

When your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your return for the immediately preceding year. If you have already filed the return for the preceding year, you can file an amended return to make the election and claim your rightful deduction in the earlier year.

The election must be made by no later than six months after the due date (without considering extensions) for filing your federal income tax return for the year in which the disaster actually occurs. But the election itself must be made on an original or amended return for the preceding year.

The decision on whether or not to make the special deduction timing election should be based on an evaluation of:

  • whether you need cash quickly, and
  • your overall tax situation in the loss event year and the preceding year.

Taxwise, the most important factor is usually your AGI in those two years.

A favorable change included in the TCJA stipulates that the 10-percent-of-AGI personal casualty loss deduction threshold does not apply to losses recognized in 2016 and 2017 arising from federally declared disasters.

Instead, the loss must be reduced by only $500. Non-itemizers can increase their standard deduction by the allowable loss.

2016 and 2017 tax returns can be amended to take advantage of this relief.

If you would like to know about the casualty loss rules and how they might help you, please do not hesitate to reach out to your team at Luster Tax Consulting to work through this with you. Please use the following link to book your complimentary strategy call with your team at Luster Tax Consulting.

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