Tips for Deducting Losses from a Natural Disaster
Natural disasters are on the rise. If you suffer damage to your home or personal property, you may be able to deduct the losses you incur on your federal income tax return.
What should you know about deducting casualty losses?
What to Deduct
Casualty loss. You may be able to deduct losses based on the damage done to your property during a disaster. A casualty is a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism.
Normal wear and tear. A casualty loss does not include losses from normal wear and tear. It does not include progressive deterioration from age or termite damage.
Covered by insurance. If you insured your property, you must file a timely claim for reimbursement of your loss. If you don’t, you cannot deduct the loss as a casualty or theft. You must reduce your loss by the amount of the reimbursement you received or expect to receive.
When to Deduct
As a general rule, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, you may have a choice of when to deduct the loss. You can choose to deduct the loss on your return for the year the loss occurred or on an amended return for the immediately preceding tax year. Claiming a disaster loss on the prior year’s return may result in a lower tax for that year, often producing a refund.
Amount to Deduct
You figure the amount of your loss using the following steps:
- Establish your adjusted basis in the property before the casualty. For property you buy, your basis is usually its cost to you. For property you acquire in some other way, such as inheriting it or getting it as a gift, you must figure your basis in another way. For more see Publication 551, Basis of Assets.
- Determine the decrease in fair market value, or FMV, of the property as a result of the casualty. FMV is the price for which you could sell your property to a willing buyer. The decrease in FMV is the difference between the property’s FMV immediately before and immediately after the casualty.
- Subtract any insurance or other reimbursement you received or expect to receive from the smaller of those two amounts.
Help in Figuring out your loss
$100 rule. After you have figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It does not matter how many pieces of property are involved in an event.
10 percent rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10 percent of your adjusted gross income.
Future income. Do not consider the loss of future profits or income due to the casualty as you figure your loss.
What Forms to Use
About Business or Income Property
Some of the casualty loss rules for business or income property are different than the rules for property held for personal use.
You can call the IRS disaster hotline at 866-562-5227 for special help with disaster-related tax issues. For more on this topic and the special rules for federally declared disaster area losses see Publication 547, Casualties, Disasters, and Thefts. You can get it and IRS tax forms on IRS.gov/forms at any time.
- Disaster Assistance and Emergency Relief for Individuals and Businesses
- Frequently Asked Questions for Disaster Victims
- Tax Relief in Disaster Situations
- Publication 2194, Disaster Resource Guide for Individuals and Businesses
- Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
- Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook
Safeguard Your Property Now
Contact CMR & Associates + PolicySmart® at 888-873-1982 or email us today to review your current insurance products and find ways to improve your coverage and reduce cost.
About CMR & Associates + PolicySmart®
CMR & Associates’ risk management consultants provide independent group benefits, retirement and insurance advice by reviewing your current plans to improve coverage and reduce cost. Through CMR’s proprietary database – The CMR Database® (comprised of some 13,000 brokers and specialists globally), we maximize access to the insurance and retirement industry for greater options that will translate to better coverage and lower cost.
Please email CMR & Associates or call 877-447-4301 or 212-447-4300 for more information.