The frequency of natural disasters seems to be increasing year to year, leaving more and more people with devastating personal and business losses. While some may say that tax season in and of itself should be classified as a “federally declared disaster,” the phrase holds more weight this upcoming year as thousands of families have been devastated by the California wildfires and East Coast hurricanes.
Beginning in 2018, the personal casualty and theft loss deduction is limited to casualty losses incurred in a federally declared disaster area. The casualty and theft deduction is only available to those who itemize their deductions, not to those who take the standard deduction.
In the instructions for the 2018 Form 4684 (Casualties and Theft Loss Deductions), the IRS defines a disaster loss as “a loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance and that is attributable to a federally declared disaster. It includes a major disaster or emergency declaration.” A list of federally declared disasters can be found at https://www.fema.gov/Disasters.
There are two limitations to qualify for the deduction:
- A loss must exceed $100 per casualty
- Net total loss must exceed 10 percent of your AGI (adjusted gross income)
You can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss. IRS Publication 976 provides information about personal casualty losses resulting from disasters that occurred in 2016 and certain 2017 disasters, including Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires.
An exception to the rule above limiting the personal casualty and theft loss deduction to losses incurred in a federally declared disaster area applies if you have personal casualty gains for the tax year. In this case, you will reduce your personal casualty gains by any casualty losses not attributable to a federally declared disaster. Any federal disaster losses that remain are subject to the 10% AGI limitation.
In a recent publication clarifying some of the new tax reform laws (Publication 5307), the IRS touched on how some of the recent laws enacted in 2018 make it easier for retirement plan participants to access their retirement plan funds. This may allow affected taxpayers to:
- waive the 10% additional tax on early distributions and
- include a qualified hurricane distribution in income over a 3-year period
- repay their distributions to the plan
- have expanded loan availability
- extend the loan repayment period
When a disaster strikes, the situation has the potential to create confusion and chaos. It helps to have a plan in place to help alleviate some of the turmoil wrought by an unanticipated crisis. We certainly hope you weren’t affected by a disaster last year, but if you were, we have you covered tax-wise.