August is the middle of hurricane season for the eastern and southern coasts. Other regions of the U.S. experience tornados, floods, and wildfires. If you're victimized by a natural disaster this summer, you could experience dramatic financial and emotional loss. While it's devastating to face this kind of catastrophe, it's helpful to know you may be able to claim a casualty loss deduction on your tax return, even though the requirements are strict. If you live in an area that is deemed a federal disaster area, you may find faster tax relief.
For starters, you may deduct a casualty loss for damage caused by an event that is "sudden, unexpected, or unusual." This includes destruction of property from natural disasters like hurricanes and even dented fenders or broken windshields from vehicle collisions. But you can't deduct casualty losses caused by gradual decay or deterioration, like damage from a summer drought.
After you reduce your personal loss by any insurance reimbursements, the deductible amount is subject to two limits.
1. You can only deduct the excess above 10 percent of your adjusted gross income (AGI); and
2. You must reduce a loss by $100 for each event.
For example, if your AGI is $100,000 and you suffer a $25,000 loss to your home after insurance reimbursements, your deductible loss is $14,900.
Normally, you're required to deduct casualty losses in the year the event occurs. However, for a loss suffered in an area that's declared a federal disaster area, you can elect to deduct the loss on the tax return for the year immediately precedingthe disaster. Therefore, homeowners with a loss due to a hurricane in 2017 might amend their 2016 return to obtain faster tax relief.
The IRS requires you to submit detailed information with this special election. If you are faced with casualty loss from a disaster, call so we can go over the details.
