By Ken Berry
This is the ninth article in our series of tax return tips for 2011 returns.
Last year was a violent year across the country due of a flurry of hurricanes, floods, earthquakes, and other natural disasters. If insurance proceeds didn't make your clients whole, they may be entitled to a modicum of tax relief on their 2011 returns. And homeowners who suffered damage in a government-designated disaster area may be in line for a quick tax refund.
The basic premise is that you can deduct unreimbursed casualty and theft losses in excess of 10 percent of adjusted gross income (AGI) after subtracting $100 per event. For simplicity, let's use the example of a couple with an AGI of $100,000 in 2011. Suppose that a storm caused extensive damage to their house costing them $9,000 after insurance reimbursements. Also, the couple paid $2,000 out-of-pocket for repairs due to a car accident. Due to the limits, they can deduct $800 ‒ not that much, but better than nothing.
Under a unique tax rule, a loss in a federal disaster area this year can be deducted on the 2011 tax return you're about to file for the client, instead of waiting to file the 2012 return next year. If you’ve already filed the 2011 return, file an amended return claiming the loss.
Note that damage caused by a taxpayer's own negligence may be deductible as well as losses that occur, even though they could have been foreseen or prevented. Furthermore, losses aren't necessarily limited to damages to the home. However, clients aren't entitled to any tax relief for damage occurring over a long period of time, such as withered landscaping caused by a severe drought.
Theft losses are grouped with casualty losses for this purpose. Again, each event must be reduced by $100 before the 10-percent-of-AGI limit is applied.
Under a unique tax rule, a taxpayer may claim a loss suffered in a federal disaster area on the tax return for the year preceding the year in which the casualty actually occurred. This can provide some much-needed relief in a pinch. For example, suppose a client's vacation home was destroyed in a wildfire in a federal disaster area earlier this year. The loss can be deducted on the 2011 tax return you're about to file for the client instead of waiting to file the 2012 return next year. If you’ve already filed the 2011 return, file an amended return claiming the loss.
The tax law limits only apply to personal losses claimed by a taxpayer on Schedule A of an individual return. There is no AGI limit or $100-per-event reduction for losses to business property.