It’s one thing when a severe storm causes your roof to leak. It’s quite another when a hurricane completely destroys your home. The reality is true disasters happen. If you have suffered a property loss as the result of a wildfire, tornado, hurricane, or flood, to name a few, you may be able to claim a casualty loss deduction on your federal income tax return.
Your loss is determined by taking the fair market value of your property prior to the disaster and subtracting the fair market value of the property after the disaster. Then you must subtract any insurance reimbursements you’ve received. The resulting number is your casualty loss. Under normal circumstances, your deductible loss is limited to amounts that exceed $100 plus 10% of your adjusted gross income (AGI). For example, if your AGI is $100,000, and you have a loss of $12,000 after insurance proceeds have been paid, you would need to subtract $10,100 from $12,000 to determine what you can deduct. In this example, your deductible casualty loss would be $1,900.
Now, in a situation where there is a federally declared disaster area, like those affected by Hurricanes Harvey, Irma, and Maria, the rules are a bit different. President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 on Sept. 29, 2017 that waives the “in excess of 10% of AGI” requirement among its provisions. If your $12,000 uncompensated loss was a result of Hurricane Irma and located in a federally declared disaster area, your deductible loss would be $11,900. Furthermore, the act does not require taxpayers to itemize to access this tax relief. For the IRS, the federally disaster areas include all of Florida and Georgia because of Hurricane Irma, 47 counties in Texas because of Hurricane Harvey, and all of Puerto Rico and the U.S. Virgin Islands for Hurricanes Irma and Maria.
Generally, you have to take a casualty tax loss in the year the loss happened. However, with federally declared disaster areas, you have the choice to claim it the year the loss occurred or the immediately preceding year. You have up to six months after the due date of your return for the year the loss happened to determine if you want to amend the prior year’s return. So for example, if you suffered a property loss because of Hurricane Irma in September 2017, you would have until October 2018 to determine which tax year you want to claim the loss.
If you claim the loss on the prior year’s return by amending the return shortly after the disaster, you may receive a refund quicker to help with repair costs. However, you may want to wait until you have a better grasp on your 2017 tax liability before making the decision. If you are in a higher tax bracket the year the loss actually occurred, it could result in more tax savings to claim it in the current year. Furthermore, if your loss is substantial enough to offset all of the income on your return, you may have a net operating loss. Any unused portion of a net operating loss created by a casualty loss can be carried back three years, then forward up to 20 years until it is used up.
IRS Publication 574, Casualties, Disasters and Thefts, further explains the tax treatment of such disasters. However, if you have experienced a loss as a result of these natural disasters, it is important to work closely with a tax consultant, as the IRS is still adjusting to accommodate the new provisions. If you have questions regarding deductions for a casualty loss, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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