Was your personal property damaged in 2018 due to a catastrophic event? Was any of it stolen or vandalized last year? If so, you may not be able to salvage any relief on your 2018 tax return. The reason: The new Tax Cuts and Jobs Act (TCJA) generally suspends the itemized deduction for casualty and theft losses for 2018 through 2025.
But there’s a ray of light in the darkness. Under the TCJA, you can continue to deduct casualty losses for damage occurring in federal disaster areas, subject to the limitations previously imposed by the tax law. In fact, you might benefit from a special rule enabling you to obtain a faster-than-usual tax refund.
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For starters, casualty and theft losses were available for personal property damage caused by an event that was “sudden, unusual or unexpected,” such as natural disasters like tornados, floods, earthquakes and hurricanes, as well as fires, vandalism and auto collisions. But the deductible amount was limited to the excess above 10 percent of adjusted gross income (AGI) after subtracting $100 per event.
For example, suppose a couple had an annual AGI of $100,000, and a severe winter storm caused extensive damage to their home, valued at a loss of $15,000 after insurance reimbursements. Due to the 10 percent-of-AGI/$100 floor rules, their deduction was limited to $4,900. The loss generally had to be claimed on the tax return for the year in which the damage occurred.
Now, this couple probably would not be able to claim any casualty loss at all. However, the same prior rules would apply if the loss was attributable to damage in a federal disaster area, as declared by the president. For 2018, this may provide some tax relief to victims of events like the California wildfires and Hurricane Michael in the Southeast.
However, there is a special exception: Under a unique tax rule, a taxpayer may claim a casualty loss suffered in a federal disaster area on the return for the year preceding that in which the incident actually occurred. This might provide a desperately needed, quick tax refund in a pinch.
For instance, say your vacation home is destroyed in a mudslide in a federal disaster area early this year. The loss can be deducted on the 2018 tax return you're about to file instead of waiting to file your 2019 return next year. If you’ve already filed the 2018 return, you might file an amended return claiming the loss.
Remember: The new TCJA rules suspend deductions for losses to personal property. There are no dollar limits—including the 10 percent-of-AGI/$100 floor rules—for business property losses. As under prior law, those remain fully deductible.