Every year, hurricanes, tornadoes, floods, wildfires, and other natural disasters affect people throughout the US. The bad news is that recovery efforts after natural disasters can be costly. For instance, when hurricanes strike they not only cause wind damage but can cause widespread flooding. Many homeowners are not covered for damage due to flooding because most standard insurance policies do not cover flood damage. Fortunately, tax relief is available–but only if you meet certain conditions. For business owners and self-employed individuals who may owe estimated taxes, for example, the IRS typically delays filing deadlines for taxpayers who reside or have a business in the disaster area.
Deducting Casualty Losses: Tips for Homeowners
Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a federally declared disaster zone (please call the office if you are not sure). You must also meet the following four conditions:
Note: Some of the casualty loss rules for business or income property are different than the rules for property held for personal use.
1. The loss was caused by a sudden, unexplained, or unusual event.
Natural disasters such as flooding, hurricanes, tornadoes, and wildfires all qualify as sudden, unexplained, or unusual events.
2. The damages were not covered by insurance.
You can only claim a deduction for casualty losses that are not covered or reimbursed by your insurance company. Keep in mind that timing is important. If you submit a claim to your insurance company late in the year, then your claim might not be processed before it is time to prepare your taxes. One solution is to file for a 6-month extension on your taxes. If you have any questions about this, please call the office.
3. The dollar amount of you losses were greater than the reductions required by the IRS.
To claim casualty losses on your tax forms, the IRS requires several “reductions,” the first of which is referred to as the $100 loss limit and requires taxpayers to subtract $100 from the total loss amount.
Next, you need to reduce the loss amount by 10 percent of your adjusted gross income (AGI). Here is an example: Let’s say your AGI is $35,000 and your insurance company paid for all of the losses except $5,800 that you incurred as a result of tornado damage. First, you would first subtract $100 and then reduce that amount by $3500. The amount you could deduct as a loss would be $2,200.
4. You must itemize.
To claim a deduction for the loss, you must itemize your taxes. If you normally don’t itemize but have a large casualty loss, you can calculate your taxes both ways to figure out which method gives you the lowest tax bill. Please call if you need help figuring out which method is best for your particular circumstances.
Two options for deducting casualty losses on your tax returns.
You can deduct the losses in the year in which they occurred or claim them for the prior year’s return. For example, if you were affected by a natural disaster this year, you can claim your losses on your 2017 tax return or amend your 2016 tax return and deduct your losses. If you choose to deduct losses on your 2016 tax return, then you have one year from the date the tax return was due to file it.
Tip: Do not consider the loss of future profits or income due to the casualty as you figure your loss.
Figuring Amount of Loss
Figure the amount of your loss using the following steps:
- Determine what your adjusted basis in the property was before the casualty occurred. 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. Please call the office for more information.
- Determine the decrease in fair market value (FMV) of the property as a result of the casualty. FMV is the price at 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 reimbursements that you received or expect to receive from the smaller of those two amounts.
Tax Relief for Small Business Owners
Individuals, as well as businesses affected by severe storms, tornadoes, straight-line winds, and flooding in Arkansas and Missouri with an estimated income tax payment originally due on or after April 26, 2017, and before Aug. 31, 2017, will not be subject to penalties for failure to pay estimated tax installments as long as such payments are paid on or before Aug. 31, 2017.
If you have been affected by a natural disaster, please call the office immediately and receive assistance figuring out when your tax payments are due.