The summer season usually brings to mind barbecues, beach days, and family camping trips. Unfortunately, summer can also mean brush fires, hurricane season, and higher theft rates. In addition to their existing insurance policies, the IRS stands ready to assist taxpayers recover financially from disaster, whether manmade or conceived by mother nature.
The IRS wants taxpayers to know it stands ready to help in the event of a disaster. If a taxpayer suffers damage to their home or personal property, they may be able to deduct the loss they incur on their federal income tax return when they file their taxes the following year. If their area receives a federal disaster designation, they may be able to claim the loss retroactively on the previous year’s taxes and get a refund into their pockets sooner. These deductions are for personal property only and do not apply to businesses or income properties.
If a taxpayer insured their property, they must file a timely claim for reimbursement of their loss. If they don’t, they cannot deduct the loss as a casualty or theft. The loss amount will be reduced from the reimbursement received or expected to receive from the home owner’s insurance policy. A deduction is available only if the loss is major and not covered by insurance or other reimbursement.
A taxpayer may be able to deduct a loss based on the damage done to their property during a disaster. The IRS defines a casualty as 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.
Losses should be deducted in the tax year the casualty occurred. However, if a taxpayer has a loss from a federally declared disaster, they may have a choice of when to deduct the loss. They can choose to deduct it on their return for the year the loss occurred or on an original or amended return for the immediately preceding tax year. This means that if a disaster loss occurs in 2017, the taxpayer doesn’t need to wait until the end of the year to claim the loss. They can instead choose to claim it on their 2016 return. Claiming a disaster loss on the prior year's return may result in a lower tax for that year, often producing a refund.
The first step in determining the amount of the loss is to figure out the adjusted basis, or owner’s cost, of the property before the casualty. Next, determine the decrease in fair market value of the property as a result of the casualty. 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 received or expected to receive from the smaller of those two amounts.
The IRS requires taxpayers to make two additional deductions to the amount of the loss before submitting the claim. After figuring the casualty loss on personal-use property, the amount must be reduced by 100 dollars. 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. In addition, the total of all casualty or theft losses on personal-use property for the year must be reduced by 10 percent of the taxpayer’s adjusted gross income.
The IRS does not take into account the loss of future profits or income due to the casualty, nor will they consider a casualty loss from normal wear and tear or from things like progressive deterioration from age or termite damage.
An IRS Form 4684, Casualties and Thefts, should be used to report the casualty loss on a federal tax return and the deductible amount should be claimed on Schedule A, Itemized Deductions. 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.