Qualified disaster losses use a $500 floor and no AGI threshold

Plain-English summary

Chief Counsel explained the special deduction limits for qualified disaster-related personal casualty losses. Instead of the ordinary $100 floor for each casualty under section 165(h)(1), a qualifying disaster loss is deductible only to the extent it exceeds $500. The normal rule allowing a deduction only when net casualty losses exceed 10 percent of adjusted gross income does not apply. These special rules came from disaster-relief legislation covering specified hurricanes, certain presidentially declared disasters, and California wildfires, rather than from the text of section 165 itself. IRS publications and Form 4684 instructions also describe the rules.

Ruling snapshot

• Question: Are qualified disaster losses subject to a $500 per-casualty floor and exempt from the 10 percent adjusted-gross-income threshold?
• Outcome: advice given, both special rules apply
• Key authorities: IRC § 165(h); Disaster Tax Relief and Airport and Airway Extension Act § 504(b); Tax Cuts and Jobs Act § 11028(c); Rev. Proc. 2018-09

Full text (IRS public release)

ID:         CCA_2019102215173264
UILC:       165.07-00

Number: 202002014
Release Date: 1/10/2020
From:
Sent: Tuesday, October 22, 2019 9:45 AM
To:
Cc:
Subject: RE: Requesting ITA Coordination

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You asked us whether Qualified Disaster Losses are subject to a $500 limitation instead of the
usual $100 limitation in § 165(h)(1), and whether net Qualified Disaster Losses are subject to the
10% adjusted gross income (AGI) limitation in I.R.C. § 165(h)(2). You were correct about these
rules applicable to Qualified Disaster losses, and neither of these rules is reflected in the Internal
Revenue Code.

For taxable years beginning after December 31, 2009, section 165(h)(1) generally allows
individuals to claim a casualty loss deduction to the extent that each casualty loss exceeds $100.
Section 165(h)(2) generally allows individuals to claim a casualty loss deduction to the extent
that net casualty losses for the taxable year exceed 10 percent of an individual's adjusted gross
income. Section 165(h)(5)(A) provides that individuals may only claim a personal casualty loss
in tax years between December 31, 2017 and January 1, 2026 if it is attributable to a Federally
declared disaster.

In the case of a qualified disaster-related personal casualty loss, individuals may claim a casualty
loss deduction to the extent that each casualty loss exceeds $500, rather than the $100 limitation
in §165(h)(1). Additionally, net qualified disaster-related personal casualty losses are not subject
the 10% AGI limitation in § 165(h)(2).

Section 504(b) of the Disaster Tax Relief and Airport and Airway Extension Act (115 Pub. L.
63) provides that casualty losses attributable to Hurricane Harvey, Hurricane Irma, and
Hurricane Maria are qualified disaster-related personal casualty losses subject to a $500
limitation and not subject to a 10% AGI limitation. Section 2.06 of Rev. Proc. 2018-09 clarifies
that the Disaster Tax Relief Act increases the § 165(h)(1) limitation from $100 to $500 and
waives the § 165(h)(2) 10% AGI limitation for qualified disaster losses. Section 11028(c) of the
Tax Cuts and Jobs Act of 2017 (115 P.L. 97) includes losses arising in a disaster area on or after
January 1, 2016 and attributable to the events giving rise to a Presidential disaster declaration as
qualified personal casualty losses. TJCA subjects these losses to a $500 limitation and eliminates
the 10% AGI limit. The Bipartisan Budget Act of 2018 includes losses arising from the
California wildfire disaster area on or after October 8, 2017 and attributable to the wildfires as
qualified disaster-related personal casualty losses subject to a $500 limitation and eliminates the
10% AGI limit.

Publication 547 and the Instructions for Form 4684 also explain the special rules for and
definition of qualified disaster losses. They clarify that individuals with qualified disaster losses
may only deduct unreimbursed amounts in excess of $500 per casualty and that net casualty
losses from qualified disasters do not need to exceed 10% of AGI to qualify for a deduction.

If you have any other questions, please contact me.

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