Talking Tax Reform - Part 1
A lot of things are changing under the Trump Tax plan and there are many, many stories being written about them. Given how modern media is a game of counting clicks, a lot of fearmongering headlines can be found. Here are a few from before the bill was passed and signed into law:
Tax-reform plan would eliminate tax deduction for wildfire losses (L.A. Daily News)
GOP Tax Plan Could Hit Wildfire Victims Especially Hard (Fortune)
GOP Tax Bill Could Eliminate Wildfire Tax Deduction (NBC Southern California)
You get the idea. The question is, what is actually going on here. The deduction as it currently exists is limited to unreimbursed losses. So if a home is destroyed and the homeowner's insurance pays out an amount that covers the full amount of the loss, there is no deduction to be had.
Not everyone is fully insured. Homes in the areas ravaged by those wildfires have been appreciating rapidly for most of the past few decades. It is in fact possible that someone may realize a gain on the loss of a home, if its value had increased since the purchase and the insurance payout was more than what the homeowner originally paid. Fortunately there is a provision under tax law that allows the tax owed on such a gain to be deferred by buying a replacement property with a cost basis equal to or exceeding the amount of such a gain.
In the case of a home being lost that was not fully insured, there is a provision under the law that allows a Casualty/Theft Loss itemized deduction. That deduction is limited by the amount of the reimbursement, by the requirement that the taxpayer be using itemized deductions, and by 10% of their adjusted gross income in the year of the loss (plus $100).
So what is changing? The rules, the methodology for calculating the loss and so on are the same in 2018 as they are right now with one exception. Right now there is no requirement for their to have been a presidential declaration of a disaster that was the cause of the loss. Starting next year, without a presidential disaster declaration, such losses are not allowed.
Tax-reform plan would eliminate tax deduction for wildfire losses (L.A. Daily News)
GOP Tax Plan Could Hit Wildfire Victims Especially Hard (Fortune)
GOP Tax Bill Could Eliminate Wildfire Tax Deduction (NBC Southern California)
You get the idea. The question is, what is actually going on here. The deduction as it currently exists is limited to unreimbursed losses. So if a home is destroyed and the homeowner's insurance pays out an amount that covers the full amount of the loss, there is no deduction to be had.
Not everyone is fully insured. Homes in the areas ravaged by those wildfires have been appreciating rapidly for most of the past few decades. It is in fact possible that someone may realize a gain on the loss of a home, if its value had increased since the purchase and the insurance payout was more than what the homeowner originally paid. Fortunately there is a provision under tax law that allows the tax owed on such a gain to be deferred by buying a replacement property with a cost basis equal to or exceeding the amount of such a gain.
In the case of a home being lost that was not fully insured, there is a provision under the law that allows a Casualty/Theft Loss itemized deduction. That deduction is limited by the amount of the reimbursement, by the requirement that the taxpayer be using itemized deductions, and by 10% of their adjusted gross income in the year of the loss (plus $100).
So what is changing? The rules, the methodology for calculating the loss and so on are the same in 2018 as they are right now with one exception. Right now there is no requirement for their to have been a presidential declaration of a disaster that was the cause of the loss. Starting next year, without a presidential disaster declaration, such losses are not allowed.
posted by me at 10:05 AM
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