Reporting Casualties Under the New US Personal Income Tax Regimen – Thefts Not So Much

The new Tax Cuts and Jobs Act (TCJA) amends Internal Revenue Code Section 165 further restricting our ability as individual taxpayers to write off CASUALTY LOSSES going forward solely to 'disaster areas' as declared by the POTUS.

Say whaaaat ?!?!?!?!?!?!?!?

Effective immediately this new restriction detailed in the US Tax Code WILL HARM ANYONE who falls victim to any tragedy that does not rise to a less than fully clear standard set by our beloved Twitter-In-Chief, aka #StableGenius (presently 'trending').

Perhaps your first thought is - no big deal.  But dear reader please be advised that this change will have profound implications that will take years to play out, if not for you then perhaps someone close to you.

Not only are casualty losses further restricted it also appears that theft losses will also only apply to federally declared disaster areas as well. 

That is #YUUUUGE!

This post glances over 8 points regarding casualty and theft losses - enough to make you a hit at the next cocktail party:

  1. How reporting for income tax purposes will (probably) shake out on your 2018 personal income taxes forward (through 2025)
  2. How to report these types of losses on your 2017 income taxes via the new IRS Form 4684. Hint... special consideration is provided for SOME hurricane victims.
  3. Casualty v. Theft Loss - What IS the difference?
  4. Safe Harbors for Determining Casualty and Theft Losses
  5. Caveats for some hurricane survivors
  6. Tidbits for the good reader in the great state of Colorado
  7. What Happens if you experience a personal financial gain from a casualty
  8. The 'bright' side of a casualty loss - if there is such a thing

First though in that everything seems to be 'fake news' these days, please allow me to indulge in a brief editorial.  If unforeseen circumstances might not impact you, stop reading immediately and call me, I want your life. Be advised...

Mother Nature does not discriminate!

Running way outside of my lane here I am not shy about emphatically promoting as part of any planning effort that EVERYONE look closely at their insurance policies (all of them) and make a concerted effort at understanding the impacts going forward of a wide assortment of prospective casualties or thefts.

Loss of shelter, loss of transportation, loss of toys (expensive or otherwise); tragedy and disaster happens all the time to many of us. The majority of these tragedies never make the news much less rise to the threshold of being declared a federal disaster. Mother Nature is accountable to no one so ask yourself these questions:

  1. How will your life change if you lose X, or Y, or Z tomorrow?
  2. What is your deductible annually and/or per incident?
  3. How close will you be getting to replacement cost if you lose X, or Y, or Z tomorrow?
  4. Do you have the resources to replace that which is cherished if it is lost tomorrow?

If you are a victim of tragedy the last thing you want to lose is your dignity.

Now on to the meat of the post...

Before the TCJA, individuals could claim as itemized deductions certain personal casualty losses, not compensated by insurance or otherwise, including losses arising from fire, storm, shipwreck, or other casualty, or from theft.

There were two limitations to qualify for a deduction:

  • a loss had to exceed $100, and
  • aggregate losses could be deducted only to the extent they exceeded 10% of adjusted gross income.

Starting immediately and for tax years 2018 through 2025, the personal casualty and theft loss deduction is only available for casualty losses incurred in a federally declared disaster by our President.

  • a loss had to exceed $500, and
  • aggregate losses could be deducted only to the extent they exceeded 10% of adjusted gross income.

So if you suffer a personal casualty loss from a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act you will be able to claim a personal casualty loss as an itemized deduction, subject to the $500-per-casualty and 10%-of-AGI limitations mentioned above.

The BIG change is that the deduction generally won't be allowed, except for PRESIDENTIAL declared disasters.

I interpret this to mean that in order for the value of a stolen object from you or me to be allowed as a tax deduction it must occur as part of a federally declared disaster.

It will be interesting to watch the regulations parse out in these regards.

People who have experienced a casualty or theft loss know that if they were insured they generally speaking after their deductible got reimbursed a fraction of the depreciated current market value of their cherished possession, NOT the replacement cost.

For those folks in the past it was comforting to know that the cost incurred to replace the item less the insurance reimbursement was generally speaking tax deductible within the limitations above. We no longer have that luxury as US Taxpayers unless our beloved leader bequeaths it so.

Casualty v. Theft Loss - What IS the difference?

For income tax reporting purposes theft includes the taking of money or property by the following means:

  • Blackmail
  • Burglary
  • Embezzlement
  • Extortion
  • Kidnapping for ransom
  • Larceny
  • Robbery
  • False representations

The taking of the property must be illegal under the law of the state where it occurred and it must have been done with criminal intent according to IRS Revenue Rule 72-112. However, you need not show necessarily show a conviction for theft, unless it it a Ponzi Scheme.

As an editorial from an old fart routinely engaged in trench warfare with our esteemed authorities I always encourage the filing of a police report for substantiation purposes on the off chance the IRS chooses to scrutinize. Also keep in mind that as best I can tell IRS Form 4864 can only be used in Presidential Declared Disasters and this purportedly this applies to thefts as well.

A casualty is a sudden, unexpected, unusual but identifiable event like a fire, storm, hurricane, tornado, flood, earthquake, drought that causes damage, destruction, or loss of property. The damage must also be permanent in nature and not merely a temporary decline in value. And now it must also be declared by the POTUS.

Safe Harbors for Determining Casualty and Theft Losses 

In a set of Revenue Procedures, the IRS has provided safe harbor methods that you may use in determining the amount of casualty and theft losses for their homes and personal belongings.

  • Rev. Proc. 2018-8 (effective 12/13/17) offers four safe harbor methods that apply to any qualifying casualty or theft loss, as well as three methods that apply only to losses occurring as a result of a federally declared disaster.
  • Rev. Proc. 2018-9 provides a safe harbor method that allows a homeowner to use one or more cost indexes to determine the amount of a home loss due to Hurricanes Harvey, Irma, or Maria (2017 Hurricanes).

Reporting for tax year 2017 - Caveat for some hurricane survivors

The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Disaster Act) provided relief to taxpayers who suffered a net disaster loss due to Hurricanes Harvey, Irma, or Maria.

The Disaster Act eliminated the 10% of AGI reduction and allowed taxpayers claiming the standard deduction to take advantage of the casualty loss provision.

In response to this, the IRS has released a new draft version of Form 4684 (Casualties and Thefts) for the 2016 tax year. Changes to the form can be found in Section A (Personal Use Property), lines 11 and 15. The IRS also has released updated draft instructions for Form 4684 that take into account these changes. Revised instructions to IRS Form 4864 can be found at www.irs.gov/pub/irs-dft/i4684--dft.pdf.

For those good reader in the great state of Colorado

(Hopefully you've made it this far into the post)

My contacts high up inside the Colorado Department of Revenue assure me that the Department understands some taxpayers will be unable to meet Colorado filing and payment deadlines as a result of various natural disasters. As a result relief on state-collected taxes for Colorado taxpayers who have been affected by recent hurricanes will be provided. Theses measures should mirror IRS measures in the same declared disaster areas.

“Affected taxpayers” include individuals who live in and businesses whose principal place of business is located in the covered disaster area. Taxpayers not in the covered disaster area, but whose tax return records that are necessary to meet a deadline are in the covered disaster area,
are also entitled to relief.

In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Colorado Peeps - Here's the CATCH!

  • The Department will not automatically apply this tax deadline waiver.
  • Affected taxpayers who reside or have a business located in the covered disaster area must call the tax information hotline at 303-238-SERV (7378) Monday through Friday from 8 a.m. to 4:30 p.m. to request the extended deadline after they receive a bill.
  • The deadline waiver applies to Colorado State tax returns and estimated payments that have either an original or extended due date occurring between Aug. 23, 2017, and Jan. 31, 2018.
  • Colorado taxpayers residing in designated disaster areas by the federal government will have until Jan. 31, 2018, to file tax returns or make payments that were due during the designated disaster.

In addition penalty relief will be provided during the extension period.

What Happens if you experience a personal financial gain from a casualty?

This is where it might get a little confusing so if you eyes start to glaze over and you want to check out, do know that I have your back.

When you have a personal gain from a casualty, personal casualty losses you can still be offset against those gains, even if the losses are NOT incurred in a federally declared disaster. 

A personal casualty gain is the recognized gain from any involuntary conversion of non-business, not-for-profit property arising from fire, storm, shipwreck, or other casualty, or from theft, such as where the taxpayer receives an insurance payment or other reimbursement that exceeds the taxpayer's adjusted basis in the destroyed, damaged, or stolen property.

If personal casualty losses exceed personal casualty gains for a tax year, the losses are allowed only to the extent of the sum of the amount of the personal casualty gains for the tax year, plus so much of the excess of personal casualty losses over personal casualty gains as exceeds 10% of your Adjusted Gross Income (AGI).

Clear as mud, right? Explained otherwise, when you have both personal casualty gains and personal casualty losses for a tax year, first reduces the amount of personal casualty gains by the amount of non-federal casualty losses.

  • Any remaining personal casualty gains are then used to reduce the amount of your deductible federal disaster losses.
  • Any remaining federal disaster losses are deductible to the extent they exceed the 10%-of-AGI floor.

This example might help

Let's say your AGI is $100,000 for the current tax year. After applying the $100-per-casualty limit, you also has $20,000 of non-federal casualty losses, $30,000 of federal disaster losses, and $25,000 of personal casualty gains for the year.

  • The non-federal casualty losses are offset against personal casualty gains
  • Personal casualty gains to be applied against your federal disaster losses are reduced to $5,000 ($25,000 − $20,000).

To determine how much of the federal disaster losses are deductible:

  1. deduct $5,000 of federal disaster losses to offset the remaining personal casualty gains.
  2. apply the 10%-of-AGI limit (10% x $100,000 AGI is $10,000).
  3. Of the remaining $25,000 in federal disaster losses, you may deduct $15,000 ($25,000 − $10,000).

On the bright side if there is such a thing

  1. If your home is located in a federally declared disaster area according to IRS [§1033(h)(1)] and IRS Revenue Rule 95-22 no gain is recognized on any insurance proceeds received for unscheduled personal property that was part of the contents of the home regardless of your basis in the unscheduled property or how the insurance proceeds are used.
  2. A casualty loss is not considered a deduction under the passive loss rules as per IRS Notice 90-21. As such a loss will be allowed in full even if it involves a passive rental activity.

For questions, comments or clarifications please feel welcome to contact me anytime. I'm waiting with baited breath for our beloved 'president' to declare all of Chicago a federal disaster area. Let the good times roll!

John R. Dundon, EA [720-234-1177, John@JohnRDundon.com]
Enrolled with the United States Department of Treasury to Practice before the IRS (Enrolled Agent # 85353). Under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent. A Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230.

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Posted in Casualty Loss, Theft Loss

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