Tax Disaster Write-Offs for Damage Could Increase

Summary

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WSJ Your Money Briefing

Episode Title: Tax Disaster Write-Offs for Damage Could Increase
Date: October 18, 2021
Host: J.R. Whalen
Guest: Laura Saunders, WSJ Tax Reporter

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Episode Overview

This episode explores the complexities of tax write-offs for disaster-related property damage, especially amid a year of increasing and costly natural disasters in the U.S. Host J.R. Whalen interviews WSJ tax reporter Laura Saunders about how current tax rules apply, pending legislative changes that may expand tax relief for victims, and practical advice for those impacted by disasters.

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Key Discussion Points & Insights

1. The Scope and Cost of Recent Disasters

• Disasters such as hurricanes, wildfires, and extreme weather events have caused billions of dollars in damages in 2021, with 18 separate billion-dollar events reported by the NOAA.
  • Quote (Laura Saunders, 02:11):

    "According to the NOAA, we've had 18 separate storms or disasters or fires this year that are over $1 billion of each."

2. Current Rules for Disaster Loss Tax Deductions

• Disaster loss tax rules are highly complex and inconsistent, often described as a "crazy quilt" of regulations enacted at various times for different purposes.
• Tax deductions are only available for federally declared disasters.
• The 10% AGI Limit:
  • You can only deduct unreimbursed losses exceeding 10% of your adjusted gross income (AGI).
    • Quote (Laura Saunders, 03:43):

      "You have to measure those. And the other problem right now is that there's this limit in place. It's a 10% of AGI limit, so that if you had $200,000 of income, then you couldn't start deducting unreimbursed losses until you got above $20,000 of unreimbursed losses."

• Insurance is always the first line of defense. Tax deductions apply only to losses not covered by insurance.

3. Proposed Legislative Changes in Congress

• Congress is considering restoring pre-2017 tax rules, which would:
  • Allow deductions for more types of disasters, not just federally declared ones (e.g., house fires, lightning strikes).
    • Quote (Laura Saunders, 04:28):

      "That would help people who just had a one off disaster like lightning struck your house or you had a house fire. Right now those things are not covered..."

  • Retroactively apply changes back to losses from 2018 onward.
• Possibility of Removing the 10% AGI Limit:
  • Congress may also eliminate the 10% AGI threshold, as has been done temporarily in previous years, though this is uncertain until legislation passes.
• Uncertainty Remains regarding which changes will survive ongoing negotiations, especially with other major spending packages in play.
  • Quote (Laura Saunders, 05:30):

    "It's not clear what they're going to retain and what they're going to cut. And part of these favorable changes fall inside the package, and part of them fall outside the package..."

4. Advice for Disaster Victims

• Seek Relief Beyond Tax Deductions:
  • Check for FEMA relief or employer assistance, which may be more beneficial than tax write-offs.
• IRS Simplified Valuation (since 2018):
  • Taxpayers can often use the "cost to cure" (cost of repairs) instead of complex appraisals to value their losses.
    • Quote (Laura Saunders, 06:40):

      "What the IRS said was that you can in many cases count the cost to cure—the cost of repairing the damage—as the amount of the loss."

  • Must use "like-for-like" replacements; extravagant upgrades are not deductible.
    • Quote (Laura Saunders, 06:52):

      "You can't replace your frozen bushes with better bushes that are three times as expensive. And if you have a car, you can't replace your Buick with a Lamborghini and have that be tax deductible."

• Resource Recommendations:
  • IRS Publication 547 for details on casualty and disaster losses.
  • Seek professional help due to the complexity of these tax issues.
  • Record-keeping is essential for dealing with the IRS.

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Notable Quotes & Memorable Moments

• On Complexity of Disaster Tax Rules:

  "The disaster loss tax rules are some of the most complicated we have and that's really saying a lot when you're talking about taxes."
  — Laura Saunders (00:55, 02:44)

• On Precarious Legislative Process:

  "We just don't know."
  — Laura Saunders (05:57), on whether Congress will pass favorable changes before year end.

• On 'Cost to Cure' Simplicity:

  "It does make things a lot simpler for taxpayers."
  — Laura Saunders (06:58), on IRS’s simplified valuation rules.

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Timestamps for Important Segments

• [02:11] – Scope and rising cost of recent disasters
• [03:43] – Tax deduction limits and how they work
• [04:28] – Pending legislative changes; expanded coverage and AGI limit
• [05:30] – Legislative uncertainty amid wider federal negotiations
• [06:40] – Practical guidance: other aid, simplified IRS valuation, and good record keeping

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Tone and Language

The discussion is direct and clear, with an emphasis on practical advice. Laura Saunders cuts through complex topics with relatable examples and candid insights into both policy and real-life implications for taxpayers.

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For further guidance, refer to IRS Publication 547 and, if needed, consult a tax professional.

Transcript

[A]

Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP Netsuite operate like a local everywhere. Visit d e l.com WSJ that's d e e l.com WSJ.

[B]

Here's your money briefing for Monday, October 18th. I'm J.R. whalen for the Wall Street Journal. Millions of Americans have suffered property damage from weather related and other disasters this year. And while insurance coverage can offset a portion of the costs, some of the remaining expenses can be deducted from income taxes. But that still leaves many with hefty repair bills.

[C]

The disaster loss tax rules are some of the most complicated we have and that's really saying a lot when you're talking about taxes.

[B]

Coming up, our tax reporter Laura Saunders will be here to break down the current rules and discuss a proposal that would make it easier to deduct disaster related expenses. That's after the break.

[A]

Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d eel.com WSJ.

[B]

Hurricanes, Fires, extreme cold it seems we've been hearing more this past year about damage to property from disasters. The cost can be enormous, even after insurance kicks in. But there's a measure in Congress that would ease the financial burden not only on property owners in the path of disasters, but but some less severe events as well. WSJ tax reporter Laura Saunders has been tracking it and she joins us now. Laura, thank you for being on the show.

[C]

Thanks so much for having me.

[B]

So Laura, when we're talking about damage from storms and other disasters, can you give us a snapshot of the kind of money we're talking about? How much damage have these kinds of disasters caused this year?

[C]

Well, billions and billions of dollars. According to the NOAA, we've had 18 separate storms or disasters or fires this year that are over $1 billion of each. And the number of these has been rising through the years. I think last year was the most, but we haven't finished this year yet. So it may be on pace to be even more storms and disasters.

[B]

So what do tax laws currently allow people to do regarding losses they've incurred from disasters?

[C]

The disaster loss tax rules are some of the most complicated we have and that's really saying a lot when you're talking about taxes because they're this kind of crazy quilt of things that are enacted at different times for different purposes and different kinds of storms and disasters and things like that. But the short answer to your question is that we don't have a lot of good coverage for disaster tax deductions right now because it's very narrow. And lately Congress has been expanding it every year in response to specific disasters, but they haven't done this for 2021 yet. What's in the tax laws right now? We should say that insurance is always the first line of defense, but deductibles and premiums are going up. And so the, the tax deductions are a pretty good backstop. And so you can sometimes get a tax deduction for your unreimbursed losses. You can't ever double dip, but you can get a tax deduction for unreimbursed losses. And you have to measure those. And the other problem right now is that there's this limit in place. It's a 10% of AGI limit, so that if you had $200,000 of income, then you couldn't start deducting unreimbursed losses until you got above $20,000 of unreimbursed losses. So that really, really crimps things for a lot of people who suffer wildfires or floods or things like that, AGI

[B]

being adjusted gross income. And I was going to ask you, are there certain kinds of disasters that these rules apply to?

[C]

Yes, generally federally declared disasters under current law.

[B]

So what is Congress working on that would change the equation?

[C]

One thing that they're working on is that they would restore the rules that were in effect before the 2017 tax overhaul. And, and they would restore them retroactively going back to 2018. And that would help people who just had a one off disaster like lightning struck your house or you had a house fire. Right now those things are not covered by disaster losses. You have to be part of a federally declared disaster like a hurricane or a Texas freeze or wildfire or something like that. So that's one thing that would help. The second thing is that they're talking about possibly taking away the 10% of AGI income limit. And there is ample precedent for this because they've done it for several years in a row, but they have to do it again. And you never know if they're going to do it until they have done it.

[B]

This past summer it seemed like there was one storm after another that posed a potential threat or made a direct hit. In the US how much Is this heightened risk that people are facing behind this effort in Congress?

[C]

Well, I think that Congressmen are aware of this, and I think that this year there's a fairly good chance that they'll act because the disasters are so widespread. Had freezes in Texas and Oklahoma, we had hurricanes. You know, Ida was both in the Gulf coast and in the Northeast, and we had California wildfires and really a couple of dozen other things that you don't hear much about, you know, flooding in Tennessee or something like that. So I think that they are becoming aware of this. On the other hand, Congress is negotiating this $3.5 trillion social spending package, and they're having to cut some things. It's not clear what they're going to retain and what they're going to cut. And part of these favorable changes fall inside the package, and part of them fall outside the package, so that even if something doesn't happen in that package, it could still happen before the end of the year in another bill. We just don't know.

[B]

You know, these proposed changes in Congress could certainly benefit disaster victims, but like you said, they're just proposals. And while insurance coverage is a good first source of funds, what else should disaster victims keep in mind that they can do to stay ahead of the potential financial impact?

[C]

The other things are things like if you could get other relief from FEMA or maybe your employers sometimes provide relief to people, look and see what you can get there. It might reduce tax deductions, but it's probably better relief. I think one important thing to say is that in 2018, the IRS gave taxpayers a gift. It used to be that when you had disaster damage, you had to get complicated appraisals in many cases. And what the IRS said was that you can in many cases count the cost to cure the cost of repairing the damage as the amount of the loss. Now, you can't replace your frozen bushes with better bushes that are three times as expensive. And if you have a car, you can't replace your Buick with a Lamborghini and have that be tax deductible. You know, there are rules about that, but it does make things a lot simpler for taxpayers. The other thing people can do is look at IRS Publication 547, which is about casualty and disaster losses. You might also consider getting expert help on this because it is a very complicated area. And the first rule always of dealing with the IRS is to keep good records.

[B]

All right, that's Wall Street Journal tax reporter Laura Saunders. Laura, thanks for being with us, and thanks for having me and that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[A]

Deal replaces fragmented Payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e l.com WSJ.