In a typical year, many individuals find themselves incurring a financial loss due to some type of unexpected event. In past years, tax filers with an uninsured casualty or theft loss could usually take a tax deduction for the financial setback. The tax rules for deducting a casualty or theft loss have changed, however, resulting in fewer tax filers with deductible losses.

Before passage of the Tax Cuts and Jobs Act in 2017, most individual tax filers were eligible to deduct a casualty or theft loss. Starting with the tax year 2018, your loss must be in a federally declared disaster area in order to claim a personal casualty or theft loss. As a result, tax filers who claim casualty or theft losses are likely to be clustered together in certain regions.

Characteristics of a casualty loss

One of the main characteristics of a deductible casualty or theft loss is that the event happens unexpectedly and suddenly. Gradual structural damage to a building caused by a leaky roof is not a qualifying casualty loss. In contrast, roof damage due to a tornado or hurricane may be a deductible casualty loss. Extreme weather events can occur anywhere, however, resulting in casualty losses outside of official disaster zones.

Effect of insurance proceeds

Insurance affects the tax status of a casualty or theft loss. The tax deduction cannot be more than the uninsured portion of the loss. In some situations, you might actually receive more in insurance proceeds than your cost basis in the asset. Even though personal casualty losses outside federally declared disaster areas are no longer deductible, a net gain due to insurance reimbursement is still taxable in all areas.

Reduced emphasis on itemized deductions

A deductible casualty or theft loss is an itemized deduction. However, the new tax law almost doubles the amount of the standard deduction. Regardless of whether you have a deductible or nondeductible casualty loss, you may now be better served by claiming the increased standard deduction instead.

The added restriction on the ability to deduct casualty losses applies only to personal income tax returns. Business entities located in all areas can still deduct the various costs of doing business, including casualty losses or theft. As of now, the added restriction on personal casualty losses is set to expire at the end of 2025.

A federally designated disaster zone can sometimes extend far beyond the areas immediately impacted by a severe weather event. You may have a deductible casualty loss, even if you are at a distance from the brunt of a major storm. Contact a company like Hough & Co CPA  for additional information on how the new tax rules will affect tax preparation.