Victims of natural and personal disastersoften can recover some of their out-of-pocketlosses by claiming a casualty lossdeduction on their federal tax return. Andfor some eligible victims, an often overlooked taxbreak can boost the size of the deduction.
First Things First
Before we talk about deductions, let's first discussthe basics. Casualty loss claims must be for a sudden,unexpected, or unusual event that results in the damageor destruction of personal property and structures.This includes natural disasters (eg, floods, hurricanes,and forest fires) and manmade disasters (eg,theft, fires, and vandalism). Also, you can't make acasualty loss claim unless you itemize deductions onyour tax return. Still, a casualty loss claim can beespecially valuable if you find yourself underinsuredor uninsured, or if the insurance you have has a highdeductible, such as earthquake coverage.
To arrive at a specific claim amount, you'll need todetermine the value of your loss. For personal propertysuch as a car or household furniture, it's what youpaid for it. For that, you'll need good records so youcan document your claim should the IRS challenge it.That's why conducting a comprehensive inventory ofyour personal property before a disaster strikes is soimportant. Since arriving at a deductible valuefor your home or other structures is more complicated,you'll need a home appraiser and a tax expert.
Next, subtract from the total value of the lossesany insurance proceeds you receive or were eligible toreceive even if you chose not to file an insuranceclaim—some people don't file because they fear theinsurance company will hike their premiums or evencancel future coverage. Also, any cash or property youreceive from your employer or a relief agency must besubtracted from the total value loss. Once theseadjustments are made, subtract $100 from your out-of-pocket loss amount. Next, reduce that amount by10% of your adjusted gross income (AGI), and whatis left is what you can claim as a casualty loss.
For example, say you suffered $20,100 in out-of-pocketexpenses and your AGI is $50,000. You wouldsubtract $100 from $20,100 and then subtract another$5000 (ie, 10% of your AGI). In this case, yourallowable itemized claim would be $15,000. Keep inmind, however, that this claim is not a dollar-for-dollartax credit. Instead, this claim is a deduction, so theactual dollar savings in taxes will depend on yourindividual tax bracket.
Now for the special tax break. Taxpayers locatedin a region the president has declared a disaster areaget to choose between two tax years to claim theirloss. They can choose either the tax year in which theloss occurred or the previous tax year. Why considerclaiming it for the previous year? For one thing, youwould use that year's AGI, which may have beenlower than the current year's AGI. That means the10% reduction will be smaller and your allowablecasualty claim larger, resulting in a larger tax refund.
Also, though you'll likely have to file an amendedreturn to claim the casualty loss, you'll probablyreceive the refund faster than if you wait to file for thecurrent tax year. It's best to review the claim with yourtax advisor to see which year makes better tax sense.If the current tax year is more tax beneficial, consideradjusting your withholding amount or your estimatedtax payments to push up the tax savings. Ultimately,of course, while filing a casualty loss claim can putmoney in your pocket, the best money saving strategyis to have adequate property and casualty insurance inplace before a disaster strikes.
This article has been produced by the Financial Planning Association
(www.fpanet.org), which is the membership organization for the financial