What is the fundamental basis for tax deductions for disaster losses?

The rationale behind allowing taxpayers to deduct losses not covered by insurance stems from the principle of providing relief to those who have experienced financial hardship due to unforeseen disasters. When a taxpayer suffers a loss from a disaster, they are allowed to claim a tax deduction for the portion of the loss that exceeds any insurance reimbursement they may receive. This approach helps ensure that individuals are not penalized for incidents outside of their control, especially when they face substantial economic setbacks.

By focusing on losses that are not compensated by insurance, the tax code aims to alleviate the burden of disaster impacts. If taxpayers were allowed to deduct the full amount of losses, including those that insurance has covered, it could lead to duplicate benefits of both insurance recoveries and tax deductions, which is generally not the intent of tax policy.

To summarize, the ability to deduct only those losses that are not covered by insurance ensures a fair and just tax relief mechanism for individuals who find themselves in financial distress after a disaster, while still upholding the principles of the insurance system.