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.

Further, a taxpayer is not entitled to deduct an otherwise allowable casualty loss if the loss has already been claimed for estate tax purposes on an estate tax return.³