Expiring Tax Provisions—Limitation on Casualty Losses

By David Donnelly, CPA-Houston

 

There are dozens of tax provisions in the 2017 Tax Cuts and Jobs Act (TCJA) that expire on Dec. 31, 2025. Tax practitioners should be aware of the more important of these provisions—one of which is the treatment of personal casualty losses.

 

Prior to the 2017 TCJA, personal casualty losses were deductible as an itemized deduction to the extent that the losses exceeded 10% of AGI.* The TCJA added Internal Revenue Code Section 165(h)(5), which states that personal casualty losses are not allowed after Dec. 31, 2017, and before Jan. 1, 2026, except for federally declared disaster areas.

 

For many taxpayers, a material casualty loss is a financially devastating event whether it occurs in a federal disaster area or not. Softening the effect of these losses by allowing a tax deduction for the casualty losses goes back to the 1867 amendment to the Civil War income tax act and has been carried forward in various ways since then. 

 

The automatic expiration of the provisions of Code Section 165(h)(5) allows the deductibility of personal casualty losses after Dec. 31, 2026. Whether this will be allowed to happen will be a matter of political debate, which debate will include the rest of expiring provisions of the TCJA. Allowing the personal casualty deduction to come back into the law does seem taxpayer friendly and hopefully Congress will allow it.

 

*This 10% of AGI limitation was waived for “Qualified Disaster Losses” that are defined statutorily to include Hurricanes Harvey, Irma, Maria, the California wildfires in 2017 and 2018, and certain other disasters between Dec. 28,2019, and before Dec. 27, 2020. The 10% AGI limitation continues in effect for “Federal Casualty Losses” and “Disaster Losses.” For these definitions, see the Page 1 of the 2023 Instructions for Form 4684.