silver linings losses

Silver Tax Lining on 2017 Returns With Deductions for Casualty and Theft Losses

Jan 24th 2018
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For taxpayers victimized by casualties or thefts, at least there was a silver lining in the dark cloud: You may have qualified for a deductible loss on your personal tax return. Now the new tax law, the Tax Cuts and Jobs Act (TCJA), repeals this deduction, except for losses caused by certain natural disasters, beginning in 2018.

But individuals who suffered losses due to casualties and thefts last year can still deduct the losses under the prior rules on 2017 returns.

Here’s the gist of it: For the 2017 tax year, you may deduct the loss attributable to an event that is, in the words of IRS regulations, “sudden, unexpected or unusual.” This covers damage from most natural disasters and other catastrophic events like auto accidents or water pipes bursting during a deep freeze. But damage that occurs over a long period of time, like termite damage, doesn’t qualify.

The IRS requires you to group casualty losses with losses due to theft on your return. The losses are generally claimed in the year of the casualty or theft. 

However, you can’t simply deduct the full amount of your loss. For starters, the amount eligible for the deduction is reduced by any insurance and other reimbursements you receive.

If the insurance covers the entire loss, there’s no tax relief available. Then, you face another daunting obstacle: Your deduction is limited to the excess loss above 10 percent of your adjusted gross income (AGI) after subtracting $100 per casualty or theft event.

For example, let’s suppose you have an AGI of $100,000 for 2017 and you suffered two casualty losses during the year. The damage for the first loss was $8,000, and the second was $4,000. Because the amount eligible for the deduction is $11,800 ($7,900 + $3,900), your actual write-off is limited to just the total amount above 10 percent of your AGI, or $1,800.

Beginning with the 2018 tax year, even this limited write-off generally won’t be available. Under the TCJA, you can only deduct casualty losses sustained in an area declared as a federal disaster area by the president under the Stafford Act. Therefore, taxpayers may be able to deduct damage to homes caused by the mudslides in California, but not for losses resulting from an isolated fire or snowstorm.

Special rules apply to certain disaster area losses in 2016 and 2017.  

Assuming you qualify for a deduction, prior law allows you to recover losses incurred in an area officially designed as a federal disaster area on the tax return for the year before the casualty loss incurs.

For example, say that you incur a deductible loss in a disaster area in February. Instead of waiting to claim the loss on your 2018 return, you can elect to deduct it on the 2017 return you’ll be filing by April 17, 2018. Therefore, you may benefit from a tax refund faster than normal.

Advise clients to get all the paperwork in order. Most important, the damage should be assessed by a reputable independent appraiser in case the IRS ever challenges the deduction. Help your clients salvage a tax deduction from the wreckage.

This article is part of a series titled Vintage 2017 Tax Deductions, which focuses on the key deductions your clients may be able to claim under the new tax law.

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