Tax & Business Alert
– April 2022
Word count target: ~ 460-480
Actual: 475 words
Abstract: In
recent months, some Americans have been victimized by severe storms, flooding, wildfires and other disasters. No matter where someone lives,
an unexpected disaster may cause damage to his or her home or personal
property. Before the passage of the Tax Cuts and Jobs Act, eligible casualty
loss victims could claim a deduction on their tax returns. But now,
restrictions make it tougher to qualify for these deductions.
Taking casualty loss tax deductions is now
harder
Unexpected disasters such as severe
storms, flooding and wildfires can happen anywhere, causing damage to your home
and personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible
casualty loss victims could claim a deduction on their tax returns. But restrictions
make it tougher to qualify for these deductions.
What’s considered a casualty for tax
purposes? It’s a sudden, unexpected or unusual event,
such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or
terrorist attack.
Higher
hurdles to qualify
The
TCJA generally eliminates deductions for personal casualty losses through 2025,
unless the losses are due to a federally declared disaster. So, victims in
several presidentially declared major disaster areas in 2021 would be eligible
for casualty loss tax deductions.
Note:
An exception to the general rule states that if you receive insurance proceeds
that result in a personal casualty gain, you can deduct personal casualty
losses up to the amount of the gain, even without a federal disaster
declaration.
Special
election
If
your casualty loss is due to a federally declared disaster, a special election
allows you to deduct the loss on your tax return for the preceding year
and claim a refund. If you’ve already filed your taxes for that year, you may
file an amended return and elect to claim the deduction for the earlier year.
This may help you get extra cash when you need it.
The
election must be made no later than six months after the due date (without
extensions) for filing your tax return for the year in which the disaster
occurs. However, the election itself must be made on an original or amended
return for the preceding year.
Calculating
the deduction
These
three steps must be taken to calculate the casualty loss deduction for
personal-use property in an area declared a federal disaster:
Be
aware that another factor that complicates your ability to claim a casualty
loss is that you must itemize deductions to do so. The TCJA raised the standard
deduction through 2025 (for 2022, it is $12,950 for single filers, $19,400 for
heads of household and $25,900 for married couples filing jointly). A higher
standard deduction means fewer individuals will itemize deductions. So, even if
you qualify for a casualty loss deduction, you might not see a tax benefit if
you don’t have enough itemized deductions.
Contact
us
The
rules described here are for personal property. Keep in mind, the rules for
business or income-producing property are different. It’s easier to secure a
business property casualty loss deduction.
If you’re a victim of a disaster — business or personal — we can help
you navigate the complex rules.
© 2022