The Federal Disaster Tax Relief Act of 2023 (H.R. 5863), which President Biden signed into law on December 12, 2024, may allow taxpayers whose personal-use property was destroyed or damaged by a presidentially declared disaster to claim a federal tax refund. This is because this new law, among other things, expands the definition of “qualified disaster” to include presidentially declared disasters occurring between January 1, 2020, and January 11, 2025.
The expanded definition of “qualified disaster” is important. Without this designation, personal casualty loss deductions are only available to taxpayers who itemize instead of taking the standard deduction. Additionally, the deduction is limited to amounts exceeding 10% of the taxpayer’s adjusted gross income (AGI) and a $100 per-loss deductible.
In contrast, a personal casualty loss arising from a “qualified disaster” is deductible even for taxpayers who do not itemize. Additionally, the loss deduction is not subject to the 10% AGI reduction. The per-loss deductible, however, increases from $100 to $500.
Taxpayers who have incurred personal casualty losses from a presidentially declared disaster now designated as a “qualified disaster” may amend their returns to claim refunds if their tax liability can be reduced by reporting disaster-related losses.
To illustrate the potential for a refund, consider married taxpayers with an Adjusted Gross Income (AGI) of $400,000 who filed a joint federal return and experienced damage to their home due to Hurricane Ian on September 28, 2022. This event resulted in an unreimbursed personal casualty loss of $50,000 for them in 2022. Since Hurricane Ian was not designated as a “qualified disaster” until December 12, 2024, the taxpayer’s personal casualty loss on the 2022 return was subject to the 10% AGI reduction (10% of $400,000 = $40,000) and a $100 per-loss deductible, thereby reducing the allowable personal casualty loss deduction to $9,900 ($50,000 – $40,000 – $100). The standard deduction for taxpayers filing jointly in 2022 was $25,900. Consequently, assuming that the allowable personal casualty loss of $9,900 combined with the taxpayers’ other itemized deductions did not exceed $25,900, the personal casualty loss would have provided no tax benefit for these taxpayers on their 2022 return. Now that Hurricane Ian is designated as a qualified disaster, the taxpayers can amend their 2022 return and claim a personal casualty loss of $49,500. Assuming the taxpayers’ marginal tax rate on their 2022 return was 32%, this personal casualty loss deduction on an amended return could generate a tax refund of up to $15,840 (32% of $49,500 = $15,840) for these taxpayers.
Eligible taxpayers should act promptly to claim a refund. The statute of limitations for claiming a refund for those who timely paid their taxes and filed their returns on or before the regular filing deadline is generally three years from the return’s due date. This means that the deadline for claiming a refund for personal casualty losses in 2021 from a “qualified disaster” may expire as soon as April 15, 2025.
For more information, please contact Michael Loesevitz at [email protected] or your ORBA advisor at 312.670.7444. Sign up here to receive our blogs, newsletters and Client Alerts.
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