Casualty losses in a federally declared disaster

How it works

Under current law, personal casualty losses are deductible only when they come from a federally declared disaster. The loss is the smaller of the property's adjusted basis or the drop in its fair market value, minus any insurance or other reimbursement. From that figure this year's official casualty loss per event floor (not yet verified here; see the official source below) is subtracted for each event, and then only the amount above this year's official casualty loss agi floor percent (not yet verified here; see the official source below) percent of adjusted gross income is deductible, as an itemized deduction. Congress has from time to time passed laws for specific disasters that drop the percent floor and allow the loss without itemizing, and the IRS lists these. The loss can be claimed in the year of the disaster or on an amended return for the year before, which can bring a refund sooner. Appraisals, photos, and repair estimates support the figure.

What it gives

A large uninsured loss can produce a real deduction in a terrible year.

The loss can be put on the prior year's return for a faster refund.

Special disaster laws sometimes remove the income floor and the itemizing requirement.

What it costs, or where the catch is

Losses outside a federally declared disaster are not deductible at all under current law.

Insurance payments reduce the loss first, so a well insured household often has nothing left to deduct.

The percent of income floor and the itemizing requirement wipe out most smaller losses.

A worked example

Sadie's home in a declared flood zone suffered $60,000 of damage, and insurance paid $35,000, leaving $25,000. If the per event floor were $100 and the income floor 10 percent of her $70,000 income, the deductible loss is $25,000 minus $100 minus $7,000, which is $17,900. She itemizes that year and the deduction saves her about $3,900 at 22 percent. She files it on an amended return for the prior year to get the refund within months.

Where it goes wrong

The common miss is skipping the insurance claim and taking the deduction instead, which is not allowed, since the loss must be reduced by what insurance would have paid.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 547, Casualties, Disasters, and Thefts. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.