How to salvage a casualty loss deduction

You’ve likely heard about the volcanic eruptions in Hawaii and how they’ve caused extensive damage to the property of several U.S. taxpayers. And as we head into hurricane and tornado seasons, other disasters are likely. Luckily, there’s a silver tax lining in the dark clouds: You may qualify for a casualty loss deduction, despite recent tax law changes.

Deduction changes starting in 2018

The casualty loss deduction has generally been suspended for 2018 through 2025, but you can still claim a loss for damage in an area formally declared as a federal disaster area. These include Hawaii during the volcano eruptions or the hurricane damage areas in the U.S. Southeast last year.

The deduction is limited to the excess unreimbursed loss above 10 percent of your adjusted gross income (AGI), after subtracting $100 for each casualty event.

Example: Your AGI is $100,000 and a severe storm resulted in $50,000 of damage to your home. If you received $30,000 in insurance proceeds, the amount eligible for the casualty loss deduction is $19,900 ($50,000 – $30,000 – $100). That means you can deduct $9,900 ($19,900 – 10 percent of AGI, or $10,000).

Note that the tax law changes don’t affect deductions for unreimbursed losses to business property — they don’t need to be in a federally declared disaster area to be deductible. Those business losses remain deductible without regard to any AGI limit or $100-per-event floor.

Special rules may apply

Individuals may take advantage of a special rule for disaster-area losses: If it suits your needs, you can choose to deduct a disaster-area loss in the tax year preceding the year of the event instead of the year the event actually occurs. As a result, you may get your tax money even sooner.