Damages to personal-use property can quickly add up, but the full amount of the loss isn’t deductible for federal income tax purposes. To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, you must take the following three steps:
- Subtract any insurance proceeds.
- Subtract $100 per casualty event.
- Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.
AGI includes all taxable income items and is reduced by certain deductions, such as the ones for student loan interest, health savings account (HSA) contributions, and deductible contributions to IRAs and self-employed retirement plans. You can potentially deduct the loss that remains after these subtractions as an itemized deduction.
For example, suppose you sustained a $50,000 loss to your home (after considering insurance reimbursements) due to a federally declared disaster in 2018. Your AGI for last year was $150,000. Your deductible loss is $34,900 ($50,000 – $100 – $15,000).
However, if your loss wasn’t due to a federally declared disaster, it wouldn’t be deductible under the Tax Cuts and Jobs Act (TCJA). See main article for details about this unfavorable TCJA change.
Important: For 2018 through 2025, it’s harder to itemize because the TCJA almost doubled the standard deduction amounts. For 2018, the standard deductions are $12,000 for single filers, $18,000 for heads of households, and $24,000 for married joint-filing couples. For 2019, the standard deductions are $12,200, $18,350, and $24,400, respectively.
So even if you qualify for a casualty loss deduction, you might not get any tax benefit for it because you don’t have enough itemized deductions.