Last fall congress passed a tax bill granting special tax relief for anyone who suffered a casualty loss as a result of the devastating hurricanes that impacted the US in 2017. In the budget deal agreed to last month, congress has finally extended those same benefits to victims of the California wildfires.
The special tax benefits have to do with being able to deduct a personal casualty loss. Normally, to deduct a casualty loss you must itemize deductions, the loss has to exceed 10% of adjusted gross income and you then subtract a 100 deductible from the loss. Here’s an example: let’s say your adjusted gross income is 100,000 and you sustain an economic loss from a casualty of 11,000 dollars. You would first deduct 10% of AGI or 10,000 and then you would subtract 100 as a deductible so your loss would be 11,000 – 10,000 – 100 = 900. This 900 would only be a deduction if you itemize deductions on Schedule A.
The special rule for deducting a casualty loss due to the wildfires is that you don’t have to deduct 10% of AGI and you can take the casualty loss whether or not you itemize deductions. However, the 100 deductible is raised to 500. So, if the above 11,000 loss occurred as a result of a California wildfire or the 2017 hurricanes you would now calculate the loss as follows: 11,000 – 500 = 10,500 as a deductible casualty loss. This loss can be taken as an itemized deduction or for those who don’t itemize deductions, the deduction would be added to your standard deduction.
Another important point to remember about casualty losses is that there must be an actual economic loss. In other words, if you were reimbursed for your loss fully by insurance, you have not sustained an economic loss. There are a couple of other tax breaks associated with casualty losses that occur in any federally declared disaster area. For any questions on how to deal with this situation, you can contact us or a competent tax professional such as an Enrolled Agent in your area.