You've made it through the storm. A hurricane, tornado or other natural disaster ripped through your town, but you're still standing. Unfortunately, your house and other possessions didn't fare as well. How do you recover from such a huge loss? The federal tax code offers you some much needed relief.
If you live in a federally declared disaster area, there are special tax rules to help you recover some of your casualty losses. These rules are very different from the rules for ordinary casualty losses. The disaster-related rules are meant to help you get back on your feet and back to your everyday life as soon as possible.
Casualty Loss Basics
For tax purposes, a casualty is when your property is damaged or destroyed by an identifiable event that's sudden, unexpected or unusual. The best examples of such events are natural disasters - earthquakes, hurricanes, floods and tornados.
In most cases, when you have a casualty loss, you can deduct:
- The lesser of (1) the property's adjusted basis - the cost of the property plus or minus an increase or decrease for things like improvements or depreciation, and; (2) the fair market value (FMV) of the property - the price someone would pay for the property on the open market
- Insurance money you're paid for the loss
- $100 - this is pre-set by the tax code, and it's known as the $100 Rule (for 2008-2009 only, you have to subtract $500)
- 10 percent of your adjusted gross income (AGI), which is generally your taxable income. This is the 10 percent Rule
Generally, in order to claim a casualty loss deduction, you have to itemize your deductions on Schedule A of your Form 1040. Also, you have to claim the deduction in the same year you have the loss.
Rules for Disaster Areas
There are special rules if you're in a federally declared disaster area. The Federal Emergency Management Agency (FEMA) keeps a list these of these areas by year and state.
No 10 Percent Rule
You don't have to worry about the 10 percent rule when it comes to your net disaster loss. That's the difference, if any, between: (1) your personal casualty losses in the disaster area, and; (2) your personal casualty gains. For example, before it was destroyed by a hurricane, your house had an adjusted basis of $150,000, but it was insured for $200,000. If you have no other casualty losses, you have a personal casualty gain of $50,000 as a result of insurance proceeds.
You don't have to itemize deductions in order to take a deduction for disaster area casualty losses. So, if you normally take the standard deduction, you take the casualty loss deduction by completing Form 4684 and entering your net disaster loss on line 6 of the standard deduction worksheet.
You can still claim the loss as an itemized deduction on Schedule A.
Choice of When to Take the Deduction
Unlike other casualty losses, which have to be claimed in the same year they happen, if you're a victim of a federally declared disaster, you can choose to deduct that loss on your tax return for the year immediately before the tax year in which the disaster happened.
If you've already filed your return for the year of the disaster, you can file an amended return to claim the loss in the prior year.
If you're claiming the loss in the year before the disaster happened, you need to include a statement with your return that specifies:
- You're making the choice to take the deduction in a prior year
- The date of the disaster
- The city, town, county and state where your damaged property was located
You have to make your choice to take the deduction in prior year by the later of:
- The due date (without extensions) for filing your income tax return for the tax year in which the disaster actually occurred
- The due date (with extensions) for filing the return for the preceding tax year
For example, to amend your 2009 return to claim a casualty loss from a hurricane in 2010, you have until April 18, 2010 to file the amended 2009 return.
Why claim the loss in the year before the disaster? Because you lower the amount of taxes you owe for that year and often either create a tax refund for that year or increase the one you already got. The IRS will send you any refund or increase immediately.
If you make the election and want to change your mind, you have 90 days to cancel the election by returning any refund or credit you received from making the choice. If you revoke your choice before receiving a refund, you have to return any refund or credit within 30 days after you get it.
Questions for Your Attorney
- Should I claim my disaster-related losses in a prior year?
- I want to claim a 2009 casualty loss on my 2010 return, but I filed it jointly with my wife. We're now divorced. Do I need to get her to agree to the amendment?
- On my 2010 return, I reduced the amount of my disaster-related casualty loss by the amount of insurance money I expected to get. The insurance company, however, just recently informed me that it will not pay my entire claim. Can I amend my 2010 return to claim the full amount of my loss?