As a general rule, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, the taxpayer may have a choice of when to deduct the loss. You can choose to deduct the loss on your return for the year the loss occurred or on an amended return for the immediately preceding tax year.
The Disaster Tax Relief Act which was signed into law on September 29th provides certain tax relief this year for individuals who suffered from qualified disaster-related personal casualty losses that arose from Hurricanes Harvey, Irma and Maria.
Prior to the Disaster Tax Relief Act, taxpayers would deduct a personal casualty losses as a Schedule A itemized deduction. Once the personal property loss amount was calculated, the taxpayer would first reduce that loss amount by $100. Then the personal casualty loss amount would further be reduced by 10% of the taxpayer’s Adjusted Gross Income (AGI), and the balance could be included on Schedule A. Due to these restrictions, smaller casualty losses are typically of limited benefit to taxpayers because they do not exceed the 10% AGI limitation.
Under the Disaster Tax Relief Act, the 10% AGI limitation requirement has been eliminated for qualified disaster-related personal casualty losses caused by these hurricanes. However, the $100 per-casualty floor for these hurricane related casualty losses was increased to $500. Also taxpayers that do not itemize can still take advantage of any qualified disaster-related casualty losses by adding any loss to their standard deduction.
Recently the IRS revised the 2016 Form 4684 – Casualties and Thefts, and its 2016 Form 4684 Instructions which should be reviewed before amending your 2016 tax returns. We are still awaiting specific information from the IRS on how they want these qualified disaster-related casualty losses reported on the 2017 Form 1040 and Form 4684. Once this information becomes available we will post it on this blog and also add it to the Pro Support Knowledgebase.