Talking Tax Reform - Part IS

I'm told that IS is the way the Romans would have written out the number we know as 1.5 back in the day.  Since this blog is an expansion on the first in this series, I thought it best to label as such.

I wrote about changes to the rules regarding the deduction for a personal casualty loss.  Under the rules prior to passage of the Tax Cuts and Jobs Act (TCJA), such deductions required the taxpayer to use the itemized deduction method in order to benefit from that deduction.  The loss of the personal exemption under this act; combined with the increase in the amount of the standard deduction, means fewer people will benefit from itemizing on their 2018 tax returns.

Personal casualty losses were further limited.  First, they were limited to the amount of the unreimbursed loss.  As an example, if you had a brand new car that you'd paid $40,000 for just days earlier.  It is totaled in an accident.  Because you'd driven it off the lot, your auto insurance company says it was already worth only $37,500.  For the purpose of simplicity we will pretend there was no deductible involved and you got a check for that amount.  Your unreimbursed loss is therefore the difference of $2,500.

Then there are two other limitations.  There is a calculation on a tax return where the "total" income is reduced by allowable "adjustments" to create what is known as Adjusted Gross Income (AGI).  Your casualty losses are limited to those that exceed $100, and that are more than 10% of your AGI.

Thanks to the TCJA, those losses are no longer allowable as itemized deductions.  But an exception was carved out for situations like most of the wildfires that happened in CA in 2018.  Almost all of them were designated as disaster areas through a presidential declaration.  Personal casualty losses incurred as a result of such a disaster are deductible, under the limitations described above.

So where is the problem?  There were a number of multi-million dollar homes in the Malibu area destroyed in the Woolsey fire.  Depending on their insurance coverage, their owners may or may not have suffered a large personal casualty loss.  Since the Woolsey fire was declared a disaster area through FEMA, any personal casualty loss would be deductible.

This past September, a fire in Brentwood completely destroyed a home that had sold earlier in the year for $13.7 million.  Depending on how much the deductible was on the policy covering that home, the homeowner might have a large unreimbursed loss.  Maybe not.  But the point is, that under the new rules, that loss isn't deductible.

What I cannot understand is why this particular deduction was targeted.  It was designed to benefit those who have suffered a loss that is larger than 10% of their income for the year.  It isn't being abused, at least not that I've seen.

Again, a reminder that the TCJA is really nothing more than a gigantic (in Trumpspeak, Yuge) giveaway to the wealthy.