8715 / When will a taxpayer’s otherwise allowable casualty loss deduction be disallowed? How does a taxpayer’s eligibility to file an insurance claim with respect to the loss impact the availability of the deduction?
Editor’s Note: Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.1
In general, a casualty loss deduction is only allowable to the extent that the taxpayer is not otherwise compensated for the loss by insurance or reimbursement from another third party.
However, if a taxpayer’s casualty loss would have been covered by insurance, but the taxpayer fails to file a timely insurance claim with respect to the loss, the casualty loss deduction will be disallowed regardless of whether the taxpayer actually receives any insurance proceeds as compensation for the loss.2 Thus, if a taxpayer chooses not to file an insurance claim with respect to a loss, the casualty loss deduction will be limited to the portion of the loss that would not have been covered by insurance.