Hurricanes and Tax Deductions

The IRS rules allow deductible casualty losses for damage from storms that entail unusually severe flooding and high water, heavy rains, and damage from hurricanes and tornadoes. The good news is that you may be able to take a deduction. The bad news is that it might not be as much as you might expect.

For personal property, the amount of the casualty loss is the smaller of the adjusted-basis of the property or the economic loss. The adjusted-basis typically is the original purchase price, or value when acquired, increased by any capital improvements. The economic loss is basically the difference between the property’s value immediately before and immediately after the casualty. The lesser amount of the two is reduced by any insurance or other reimbursement you received or expect to receive. After you have figured the amount of your casualty loss, you must figure how much of the loss you can deduct.

When the loss was to property for your personal use, the IRS will apply the following additional limitations: The casualty loss is first reduced by $100, and then reduced by 10% of your AGI. In other words, if you still have a loss after the above reductions, you have a deductible casualty loss, which is then reported as an itemized deduction.

 

Determining the Amount of Loss

Determining the pre-casualty value of the property, and the value after the damage, is the most difficult aspect of claiming the loss. The taxpayer must be able to prove and document the fair market value both immediately before and after the damage. This is easier to do with homes and cars than items such as trees and landscaping, find professional advice in relation to truck and fleet insurance on loanreviewhq.com. Generally, an appraiser with knowledge of the area and type of property is required. Generally, as with most deductions, a casualty loss is deducted in the year the loss was incurred. The IRS and state taxing authorities give further concessions to taxpayers when the casualty occurs in a federally declared disaster area. The principal tax advantage of a casualty loss from a federally declared disaster area is you can choose to deduct that loss on the tax return for the year in which the loss was incurred, or for the tax return filed in the year of the loss. Therefore, losses from Hurricane’s Harvey and Irma can be deducted either on one’s 2017 tax returns which will be filed in April 2018 or as extended, or by amending one’s 2016 tax returns. This allows taxpayers to receive economic relief sooner than normal. It also allows for tax planning for optimizing when to claim the loss based on AGI and other tax factors.

 

Freeman Tax Law Can Help

We understand the devastating physical and emotional damage that these storms have caused.  If you have any questions regarding the tax deductions available due to hurricane or storm damage, please contact our office.