It’s difficult for victims of a natural disaster, like a hurricane, flood, or tornado, to pick up the pieces and put their lives back in order, especially if their home was destroyed. But at least there may be a silver tax lining in the debris. If you qualify, you may deduct part of your unreimbursed loss on your personal tax return.
In fact, you might not have to wait very long for a tax refund. Under a special provision of the tax code, you can elect to deduct the loss on last year’s return, even though the loss occurred this year.
First, let’s briefly review the basic rules. The tax law allows you to deduct the loss sustained from an event that is, in the words of IRS regulations, “sudden, unexpected, or unusual.” This covers damage from most natural disasters and other catastrophic events, such as car accidents or water pipes bursting during a deep freeze. But damage that occurs over a long period of time, like termite damage, doesn’t qualify.
The IRS requires you to group casualty losses with losses due to theft on your return. The losses are generally claimed in the year of the casualty or theft.
However, you can’t simply deduct the full amount of your loss. For starters, the amount eligible for the deduction is reduced by any insurance and other reimbursements you receive. If the insurance covers the entire loss, there’s no tax relief available. Then you face another daunting obstacle: Your deduction is limited to the excess loss above 10 percent of your adjusted gross income (AGI) after subtracting $100 per casualty or theft event.
Suppose you have an AGI of $100,000 and you suffered two casualty losses in 2016. The damage for the first loss was $8,000, and the second was $4,000. Because the amount eligible for the deduction is $11,800 ($7,900 + $3,900), your actual write-off is limited to just the total amount above 10 percent of your AGI, or $1,800.
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Assuming you qualify for a deduction, the tax law allows you to recover losses incurred in an area officially designed as a federal disaster area on the tax return for the year before the casualty loss incurs.
For example, say that you incur a deductible loss due to a severe snowstorm in February. Instead of waiting to claim the loss on your 2017 return, you can elect to deduct it on the 2016 return you’ll be filing before April 18. Therefore, you may benefit from a tax refund faster than normal.
Similarly, if the loss is incurred after you’ve already filed your 2016 return, you can submit an amended return or choose to wait until you’re ready to file your 2017 return. Usually, there’s no reason to wait.
Make sure you have all your paperwork in order. Have the damage assessed by a reputable independent appraiser in case the IRS ever challenges the deductible amount. The cost of the appraisal itself is deductible as a miscellaneous expense subject to the tax return limits for those expenses.
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