“Out with the old, and in with the new” is a well known quote, first said by Lee Douglas IV.
The IRS Casualty Loss rules that we could use to deduct losses as recently as 12/31/17 are “out” and more restrictive rules are “in”- effective January 1, 2018. This change was part of recent tax reform titled ‘The Tax Cuts and Jobs Act of 2017’.
- Old rules allowed you to take a Casualty or Theft loss without a presidential Federally declared major disaster
- New rules only allow a Casualty (not a theft) loss deduction when a presidential Federally major disaster is declared
- On 8/4/18, The Carr Fire, in Shasta County, CA received this declaration verbally and the declaration was posted on the IRS website on 8/6/18, on the California state specific page
When this occurs, the IRS has special tax law provisions that may help taxpayers and businesses recover financially. Depending on the circumstances, the IRS may grant additional time to file returns and pay taxes. Both individuals and businesses in a federally declared disaster area can get a faster refund by claiming losses related to the disaster on the tax return for the previous year, usually by filing an amended return. Yes, this means that your 2018 loss could be used to amend your 2017 tax return, or the loss could be used be used on your 2018 tax return. Applying the loss to an amended return, could provide funds to help rebuild now. If you wait, possibilities can be quantified for both years before the decision is made. Affected taxpayers claiming the disaster loss on a 2017 return should put the Disaster Designation, “California, Wildfires and High Winds” at the top of the form so that the IRS can expedite the processing of the refund. With the broad perspective in mind, lets explore beginning details.
A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. It does not include normal wear and tear or progressive deterioration (termite damage). Although only the Carr Fire currently qualifies for this special IRS treatment, a broad definition is provided, because of the possibility of future Presidential Declared Disasters (PDD’s).
- Is your casualty loss in a PDD area?
- If so, the deduction is used on Schedule A- Itemized deductions
- Is your Itemized Deductions greater than your Standard Deduction?
2018 Standard Deduction:
- Married Filing Joint $24,000
- Head of Household $18,000
- Single $12,000
- Married Filing Separate $12,000
- Additional small deduction is available for over 65 &/or blind
2017 Standard Deduction:
- Married Filing Joint $12,700
- Head of Household $ 9.350
- Single $6,350
- Married Filing Separate $6,350
- Additional small deduction is available for over 65 &/or blind
Claiming the Loss:
- Individuals claim their casualty loss as an Itemized Deduction on Form 1040, Schedule A
- For property held by you for personal use, you must subtract $100 from each casualty event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement
- Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty loss for the year
- Consider using your 2017 Adjusted Gross Income (AGI) as a benchmark – (the last line, on the 1st page, of your 1040 tax return)
- Report the loss on Form 4684, Casualties and Thefts
- Use Section A for personal-use property and Section B for business or income-producing property
- If personal-use property was damaged or destroyed you may wish to refer to Pub 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
- For losses involving business-use property, refer to Pub 584-B, Business Casualty, Disaster, and Theft Loss Workbook
- These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records
Initial Action Steps:
- Inventory your loss by property type- Real Property (real estate); Personal Property (automobiles); Business or Investment property
- If you own real estate, determine your basis – (cost or adjusted basis)
- If you need to replace IRS information, use their “Get Transcript” tools, for wage/income information and to obtain previous tax returns
- State tax rules are different; research yours when you can, to see if tax benefits are available there
- When you can:
- Quantify the value of items lost
- Quantify the money received to replace part of your loss
- Find your initial IRS loss number: Value of items lost – money received = unreimbursed loss
- Use the Unreimbursed loss number to see if the IRS rules, included above, can help you recover, at least some, financially
- If you have questions, feel free to contact me via e-mail or by phone; if you use e-mail, please do not send attachments or any personal financial information- that information should always be protected
Almost two (2) years ago, on 8/23/16, I wrote a blog titled, “Can the IRS help you recover from Mother Nature?” Information about “Net Operating Losses” or “How to Quantify the Loss” can be found there.
In January 2018, I attended an eight (8) hour “Casualty Loss Training” workshop, hosted by the National Association of Tax Professionals. The workshop was created to help Tax Professionals help those affected by Hurricanes Harvey, Irma, and Maria. It may be helpful to know that special legislation was passed to further help those affected by the named hurricanes. The Disaster Tax Relief and Airport and Airway Extension Act of 2017, HR 3823, was signed in to law on September 29, 2017. Perhaps, special rules will be provided to help California recover, faster, with new legislation written just for you.
As I finish writing this blog, the Mendocino Complex fire has just become the largest fire in California history. My heart goes out to all those affected. Although I was born in Michigan, I grew up in Los Gatos, CA and have family residing from one end of the state to the other-literally. I have family in Redding and in Weaverville, which is why I have followed the Carr Fire so closely; I also have a lot of family/friends in San Diego and others scattered through out the state.
From a heart perspective, I have a sense of what loss and recovery feels like. As a result of the hurricanes last year, I had family/friends living in 5 federal disaster areas: Bexar County (myself in San Antonio); Harris County (my son and others in Houston); and my parents and other family in Florida. During that time, I was posting helpful resources as they became available to me. I will continue to watch the California fires and will share information with you. We might live in separate states, but that just means we are not close neighbors. People as far away as Australia and New Zealand are coming to help you and I want to help you too.
“It always seems impossible until it is done.” – Nelson Mandela
Thanks for reading,
Deborah Ann Fox, CPA helps Individuals and Small Business Owners build and protect their financial wealth. She can help by being your financial compass by providing education and service, while you captain your ship and make the decisions.
Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.
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