Personal casualty losses are non-deductible from 2018 in PolicyEngine, but §165(h)(5) still allows losses attributable to federally (and, from 2026, State) declared disasters #9920

Found by the policyengine-scorecard reform-validation diagnosis (batch 2), PolicyEngine/policyengine-scorecard#146. Memo: diagnosis/batch2/A.md, item A5.
Related: #9912 (open; $100 per-casualty reduction; lists "declared-disaster attribution" and P.L. 119-108 qualified disaster losses as not modeled), #9888 (open; Montana, same note).

What the engine does (main @ 6b80a8e = 2.2.1 for these files)

policyengine_us/parameters/gov/irs/deductions/itemized/casualty/active.yaml:8-11

    # OBBB extends extends elimination of casualty expense deduction, with an exception for state declared disasters.
values:
  2013-01-01: true
  2018-01-01: false

policyengine_us/variables/gov/irs/income/taxable_income/deductions/itemizing/casualty_loss_deduction.py:11-16

    def formula(tax_unit, period, parameters):
        loss = add(tax_unit, period, ["casualty_loss"])
        p = parameters(period).gov.irs.deductions.itemized.casualty
        positive_agi = tax_unit("positive_agi", period)
        amount_over_floor = max_(0, loss - positive_agi * p.floor)
        return p.active * amount_over_floor

casualty_loss (variables/household/expense/tax/casualty_loss.py) is one person input with no disaster attribution. From 2018 every personal casualty loss is therefore non-deductible. The parameter comment names the exception but no code implements it.

What the statute says

26 U.S.C. 165(h)(5)(A) (Cornell LII, current text, under (h) "Treatment of casualty gains and losses", (5) "Limitation for taxable years beginning after 2017"):
"In the case of an individual, except as provided in subparagraph (B), any personal casualty loss which (but for this paragraph) would be deductible in a taxable year beginning after December 31, 2017, shall be allowed as a deduction under subsection (a) only to the extent it is attributable to a Federally declared disaster (as defined in subsection (i)(5)) or a State declared disaster."

26 U.S.C. 165(i)(5)(A) (LII; "[2]" is LII's footnote marker): "The term “Federally [2] declared disaster” means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act."

The "State declared disaster" wording and the removal of the 2025 end date come from OBBBA:

Pub. L. 119-21, § 70109 (139 Stat. 163-164), govinfo text:
"(a) In General.--Section 165(h)(5) is amended-- (1) in subparagraph (A), by striking , and before January 1, 2026'', and (2) by striking 2018 Through 2025'' in the heading and inserting Beginning After 2017''. (b) Extension to State Declared Disasters.-- (1) In general.--Subparagraph (A) of section 165(h)(5), as amended by subsection (a), is further amended by striking (i)(5))'' and inserting ``(i)(5)) or a State declared disaster''. ...
(c) Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2025."

So for TY2018-2025, losses attributable to a Federally declared disaster stay deductible; from TY2026, losses attributable to a State declared disaster are added (165(h)(5)(C) defines the term).

A later law also changes this area:

26 U.S.C. 165(h)(6)(A) (added by Pub. L. 119-108, § 2(a), Sept. 11, 2026): "If an individual has a qualified net disaster loss for any taxable year, the amount determined under paragraph (2)(A)(ii) shall be the sum of— (i) such qualified net disaster loss, and (ii) so much of the excess referred to in the matter preceding clause (i) of paragraph (2)(A) (reduced by the amount in clause (i) of this subparagraph) as exceeds 10 percent of the adjusted gross income of the individual."

26 U.S.C. 63(b)(8) (added by Pub. L. 119-108, § 2(c)): "so much of the deduction allowed by section 165(a) as is attributable to the qualified net disaster loss (as defined in section 165(h)(6)(B))."

Pub. L. 119-108, § 2(d)(1) (note under 26 U.S.C. 63): "The amendments made by this section [amending this section and section 165 of this title] shall apply to taxable years beginning after December 31, 2024."

Proposed change

1. Add a person input for the part of casualty_loss attributable to a declared disaster (Federally declared for 2018-2025; Federally or State declared from 2026). Apply active = false only to the remainder.
2. Optionally (or as a follow-up, as Apply the Form 4684 $100 per-casualty reduction and drop dependents' losses in the federal, NY, AL and HI casualty deductions #9912 suggests): qualified disaster losses under 165(h)(6) ($500 reduction, no 10% floor) and the non-itemizer deduction under 63(b)(8), TY2025+.
3. Coordinate with Apply the Form 4684 $100 per-casualty reduction and drop dependents' losses in the federal, NY, AL and HI casualty deductions #9912, which adds the $100 per-casualty reduction.

Tests (hand-computed from the text above: $100 reduction under 165(h)(1), as #9912 adds it, then the 10% floor under 165(h)(2); single casualty, no casualty gains):

• TY2026, itemizer, AGI $100,000, $20,000 loss not attributable to any declared disaster: 0.
• TY2026, same, loss attributable only to a State declared disaster (no Presidential declaration, so 165(h)(6) does not apply): (20,000 - 100) - 10,000 = 9,900.
• TY2025, the same State-declared-only loss: 0 (State declared disasters enter 165(h)(5)(A) from TY2026).
• Federally declared disaster cases: build from the Form 4684 instructions, because the qualified-disaster rules (165(h)(6) from TY2025; before that the provisions Pub. L. 119-108 § 2(d)(2) supersedes) change the $100/$500 reduction and the 10% floor.

Impact and data note

• With the current certified dataset this change alone does not move baseline results: the input would default to 0. It matters for household calculations and for any dataset that carries the attribution.
• Context: JCX-48-24 Table 1 (PDF p. 32, Income Security) lists "Deduction for casualty and theft losses" for individuals at $0.1B in FY2024 and FY2025, so a post-2017 deduction exists in practice.
• In the scorecard's OBBBA row, the revert (gov.irs.deductions.itemized.casualty.active: true) gives back all losses, including disaster losses that are deductible in both worlds. PE is 2.27x JCT's FY2027 value ($0.29B vs $0.128B). That value rests on 33 PUF-derived tax units, one of which holds about half the weighted dollars, so the comparison is indicative only.