Since Hurricane Sandy is projected to cause considerable property damage, it may be timely to review the IRS rules regarding claiming a casualty loss. Casualty (e.g., fire and storm) (and theft) losses are claimed on IRS Form 4684.
As with any tax deduction, the taxpayer needs to verify the amount of the loss. Since most taxpayers have homeowners, apartment, or auto insurance, any loss resulting from a casualty is usually verified by an insurance claim. This is the starting point to identify the amount of the loss. From this amount, the insured would reduce it by any benefit for loss paid by the insurance carrier. It is important to note that related expenses resulting from the casualty are not tax deductible, such as the treatment of personal injuries or for the rental of a car. Improvements made to a property to prevent future damage, such as erecting a retainer wall to prevent water from infiltrating a home, are also not tax deductible. Improvements are added to the tax basis of the property. The tax rules can be illustrated as follows: If a person submits an insurance claim for a $10,000 loss, and the insurance carrier pays $7,000 of the insured’s claim, the taxpayer has a casualty loss for tax reporting purposes of $3,000. The IRS also has other limitations as to the amount of the casualty loss that can be claimed. The first $100 of the loss is not deductible. Thus, using the above example, the tax loss is now $2,900. There is also a much more significant limitation which is that the loss must exceed 10% of the taxpayer’s AGI (adjusted gross income). Using the above example, if the taxpayer’s AGI was $29,000 or greater, the taxpayer would not be entitled to a casualty loss deduction as 10% of $29,000 is $2,900.
It is assumed in this example that the insured suffered a $3,000 loss for items not covered by the insurance policy. It is important to note that if you have an insurance policy, a loss is only deductible if a timely insurance claim is filed. Using the above example, the insured could not claim a $10,000 casualty loss if covered by insurance policy and a timely claim was not made. However, the insured could still claim the $3,000 casualty loss on Form 4684 because the loss was not related to insured items. Should an individual receive more money from the insurance carrier than the damage incurred, that is considered a taxable gain by the IRS.
The casualty loss is deductible in the year that the loss was incurred. If the taxpayer is unsure as to the amount of the insurance reimbursement, then the taxpayer is to deduct the uncertain portion of the claim in the year that the insurance reimbursement amount is known. If the taxpayer receives a reimbursement in a following year in excess of the amount anticipated when the casualty loss was claimed, then the taxpayer is required to report the “excess” reimbursement as income in the year received. Since Hurricane Sandy may be declared as a disaster loss by the President, you can deduct that loss in the tax year immediately preceding the year of the disaster. This may require that an amended tax return be filed for that prior year.
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