The Personal Casualty and Theft Loss Tax Deduction:

Analysis and Proposals for Change

GGD-80-10: Published: Dec 5, 1979. Publicly Released: Jan 2, 1980.

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A report examined factual and legal issues pertaining to proposed deficiencies in the personal casualty and theft loss deduction provision of the federal income tax laws. The public policy considerations underlying original enactment of the provision in 1867 are not specifically stated. However, it may be inferred from the President's Tax Expenditures Budget of that year that the provision was intended to reduce income tax liabilities for taxpayers in special circumstances which have a significant bearing on financial capacity to pay an income tax. Under present tax rules, the special circumstances include both uninsured personal losses and personal losses following partial insurance reimbursement. In either case, the result is to make the government a coinsurer of losses to nonincome-producing property held for personal use.

Statistics indicate that the personal casualty and theft loss deduction does not serve an ability-to-pay function for low income taxpayers unable to afford the cost of insurance. Most of the taxpayers in the sampling used for the report were in the higher income levels and sustained a loss with respect to uninsured or underinsured personal assets. Moreover, 27 percent of the loss property in the sample cases consisted of ornamental trees and shrubbery and miscellaneous personal property, the loss of which does not significantly affect financial capacity for income tax purposes. The regulations of the personal casualty and theft loss deduction are difficult to apply, and there is a high-error rate among those who claim under this provision. Personal casualty and theft loss cases are seldom settled on the basis of the loss computation rules of the regulations. Compliance with the literal requirements of the regulations decreases at successive stages of the appeals process, reflecting the fact that settlement of contested losses is reached by negotiation on the basis of litigating hazards. Finally, inequities result from the computation-of-loss rules and the netting requirements of the regulations which result in different tax treatment to taxpayers who have suffered like economic losses to uninsured or partially insured personal property.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should reassess the need to retain the personal casualty or theft loss deduction provision in its present form. In making such a reassessment Congress could consider: (1) repeal of the personal casualty or theft loss deduction; (2) repeal of the personal casualty or theft loss deduction with allowance for a deduction for all or a percentage of the cost of premiums for casualty and theft loss insurance covering real property and personal effects; (3) limitation of the allowable deduction to an amount in excess of stated percentage of adjusted gross income; (4) removal of the casualty or theft loss of personal property from the netting rules applicable to gains and losses from investment assets and depreciable business assets; (5) treatment of an excess personal casualty or theft loss as a net long-term capital loss carryover; and (6) amendment of the calculation of loss rules applicable to the casualty loss of nonincome-producing personal perperty to limit recognition of the amount of loss to adjusted cost basis, reduced by changes in market value unrelated to the casualty.

 

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