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1 1 (February 13, 2024)

handle is hein.crs/goveoic0001 and id is 1 raw text is: Congressional Research &e Informing the Iegislative debate since 191 Updated February 13, 2024 The Casualty and Theft Loss Deduction The Internal Revenue Code has let some taxpayers deduct unreimbursed losses caused by recent disasters and thefts from their income subject to the income tax. Congress temporarily limited the casualty and theft loss deduction as part of the 2017 tax law (P.L. 115-97; popularly known as the Tax Cuts and Jobs Act or TCJA) to losses resulting from federally declared disasters for tax years 2018-2025. Among other recently proposed legislative changes, H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, would expand this deduction retroactively. The deduction offers financial relief to some taxpayers who suffer unexpected monetary damage; in doing so, it reduces federal revenue. It also subsidizes uninsured losses without offering similar benefits to insured losses or loss-mitigation expenses, potentially distorting taxpayers' incentives to insure themselves for losses or spend money on disaster loss mitigation expenses. This In Focus discusses the structure of the deduction-both before and after the changes that began in 2018-and analyzes its potential impact on the federal budget and taxpayers' decisionmaking. Overview Prior to 2018, households who itemized their deductions could deduct their unreimbursed net personal losses that arise from fire, storm, shipwreck, or other casualty, or from theft from their income. From 2018 through 2025, the TCJA provides that the deduction is limited to losses that result from federally declared disasters. Under permanent law, taxpayers can only deduct such losses to the extent each loss exceeds $100, and their total exceeds 10% of the taxpayer's adjusted gross income (AGI). The damaged item does not need to be repaired or replaced for the taxpayer to claim the deduction. Taxpayers can claim this deduction regardless of their income, and there is no cap on the size of the deduction a taxpayer can claim. Those whose deductions exceed their taxable income can carry the deduction forward to subsequent tax years. The restriction of eligibility for unreimbursed losses means that only losses that insurance does not compensate qualify. Additionally, it applies only to personal losses-losses on business property are subject to different rules. Taxpayers must generally claim the deduction in the year in which they discover the loss, even if that differs from the year in which the loss occurred. However, under permanent law, taxpayers can generally choose to take the loss in the year prior to the casualty if it results from a federally declared disaster, meaning one declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (P.L. 100-707, as amended), and it occurs in the disaster area identified in that declaration. Qualified Disaster Losses Congress has passed legislation declaring certain losses to be qualified disaster-related personal casualty losses. Taxpayers with qualified disaster losses can claim a more generous casualty and theft loss deduction than others. They can deduct qualified disaster losses even if they also claim the standard deduction. Their per-event limitation is generally $500 instead of $100, and they are not limited to deducting losses that exceed 10% of their AGI in sum. This designation generally applies either to specific disasters or to any federally declared disasters incurred during a specific period. Among others, the disasters in this category have included federally declared disasters in 2016 or 2017; federally declared disasters that began in 2018 and before December 21, 2019, and continued no later than January 19, 2020; and federally declared disasters (besides those declared solely because of the COVID-19 pandemic) that were declared between January 1, 2020, and February 25, 2021, and occurred between December 28, 2019, and December 27, 2020. Legislative History The Revenue Act of 1913 (P.L. 63-16), which created the modern federal income tax, also created the modern deduction for casualty losses, without distinction between business-related and nonbusiness-related losses. Theft losses were eligible by 1916. The Revenue Act of 1964 (P.L. 88-272) placed a $100-per- event floor on the deduction, corresponding to the $100 deductible provision common in property insurance coverage at that time. The limitation to losses that, in sum, exceed 10% of the taxpayer's AGI was created by the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248). Congress has at times expanded the deduction in response to specific disasters. The Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) eliminated the per-casualty and AGI floors for deductible losses arising from the consequences of Hurricane Katrina. Congress removed the floors for losses arising from several other disasters in subsequent years. The Emergency Economic Stabilization Act of 2008 (P.L. 110-343) expanded the deduction similarly for all federally declared disasters occurring in 2008 and 2009, but imposed a $500 per-casualty limitation and let taxpayers claim the deduction in addition to the te

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