In recent years, some Americans have been victimized by severe storms, flooding, wildfires, and other disasters. So what can you do when this causes your personal property to be damaged or destroyed?
If your home is damaged by a natural disaster, you may not be eligible on your standard insurance policy for coverage. Fortunately, tax relief is available – by meeting certain conditions. Under the Tax Cuts and Jobs Act, which went into effect in 2018, an individual taxpayer cannot claim an itemized deduction for a casualty loss, unless it results from a federally-declared disaster. A federally-declared disaster includes both a major disaster declared under section 401 of the Stafford Act and an emergency declared under section 501 of the Stafford Act. A deduction can be claimed in the year in which you sustained the loss or it can be treated as if the loss had happened in the previous year.
The following conditions also need to be met:
Loss resulted from a sudden, unexpected, or unusual event.
This includes natural disasters such as flooding, tornadoes, and wildfires that have been declared a disaster by the U.S. President.
The damages incurred were not covered by your insurance company.
If a claim has been filed with the insurance company, the tax deduction is commensurately reduced by any reimbursement.
The IRS requires several “reductions.” If the dollar amount of losses were greater than these reductions, you may qualify for deducting a casualty loss.
There are three steps to calculating a casualty loss deduction for personal-use property. First, subtract any insurance reimbursement from the loss. Then, reduce $100 per casualty event. The final step is to combine the results of the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction. For real property such as your home, the calculation is more nuanced and is beyond the scope of this article.
To claim a deduction for the loss, you must itemize your deductions.
Therefore, if you usually take the standard deduction, you must first determine whether the casualty loss deduction now makes it advantageous for you to itemize.
If you qualify under these conditions, you may claim casualty losses by reporting and calculating them on Form 4684. You can enter the resulting number on Schedule A when you itemize, along with your other itemized deductions.
Do Theft Losses Qualify for a Casualty Claim?
The IRS defines theft as the act of taking and removing property with the intention of depriving the owner of it. The act must also be illegal under state law. But as in the case of a casualty claim, the theft must have occurred in a presidentially-declared disaster area.
For example, a tornado strikes your hometown, and the president declares that it’s a disaster area. If a thief gains entrance to your home through a broken window and steals valuables from your home, this may be a qualified theft deductible under the law.
Other losses that do not qualify include property such as glassware or furniture that broke under ordinary conditions, or progressive property damage caused by insects or disease.
You may be able to deduct as a capital loss for property that you have lost or experienced a decline in the market value of the stock due to misconduct of the officers of the corporation issuing the stock.
Extra Tax Relief for Disaster Victims
The government typically extends extra tax relief for victims of any particularly devastating disasters that occur throughout the year to include postponement of time to file returns, pay taxes and perform other time-sensitive acts.
Visit FEMA.gov to locate a presidentially declared disaster. For disaster assistance, visit DisasterAssistance.gov or call 1-800-621-3362.
Consult with a tax professional to find out more about casualty losses and tax deductions.
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Read more here: https://www.nnbw.com/news/2023/mar/02/smart-money-deducting-casualty-losses-on-a-tax-return/