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How to Claim Tax Deductions After a Disaster

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After a natural disaster strikes, there's a lot of work for survivors to do, especially if their residence was rendered unfit to live in by the event. This work includes not only rebuilding their home, but also filing insurance claims and figuring out if they're in a federally designated "disaster area."

Oct 21st 2021
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If you're just joining us, I recommend reviewing part one of the series on tax breaks for disaster victims for introductory comments on the deductions available to Hester, a disaster survivor. To qualify, she must satisfy two stipulations. 

First, she suffers losses that are “sudden, unexpected or unusual” natural disasters, such as extreme weather events like hurricanes and tornadoes. Second, her losses occur in disaster areas declared by a president to be eligible for federal assistance. Part two will focus on other highlights of deductions for disaster victims.

Insurance. Hester has to file claims and account for settlements. The IRS requires Hester to reduce her losses by any insurance settlements or other reimbursements she has received or expects to receive.

Hester also has to do without any deductions if she fails to file claims (Section 165 (h) (4) (E). Does it matter that her submission of claims might provide insurers with excuses to boost deductibles, increase premiums, or even cancel coverage? Nope. However, the IRS acknowledges that write-offs are allowed for amounts not covered by insurance, including deductibles.

Two floors for personal-use property losses. Part one noted that Hester has to subtract $100 for each loss, after taking into account insurance reimbursements, and losses have to exceed 10 percent of her adjusted gross income. Uninsured losses generally are allowable only to the extent that the total amount in any one year surpasses 10 percent of her AGI.

While the agency usually mandates another subtraction of $100 for each loss, it orders only one $100 reduction when the same event damages several items. 

For instance, the same flood damages Hester’s home and detached garage, or a year-round home and a summer cottage. The same is true when a hurricane damages her dwelling twice—first by winds and then by high waves.

Suppose she suffers losses of $30,000 after insurance recoveries; her AGI is $200,000. Those numbers shrivel her deducible loss to just $9,900––what remains after $30,000 is offset by $20,100 (the sum of $100 and $20,000 (10 percent of AGI)).

Other exceptions. The IRS doesn’t require Hester to apply the two floors to casualty or theft losses of property that she uses partly for business and partly for personal purposes, such as a car. She uses an allocation method to compute the loss deduction.

It’s okay for Hester to treat the event as if the loss was suffered by two pieces of property, one business and the other personal. She’s entitled to a full deduction for the business use part, regardless of whether anything may be deductible for any personal use losses. In the case of a car used 70 percent of the time for business driving, she claims a business-expense deduction for 70 percent of the repair costs.

Close, but no cigar. In some situations, damaged property might be in close proximity to a disaster but not actually within the officially designated area. This is so even though the damage was attributable to the same event that resulted in an official designation for the neighboring area.

An example: In August 2004, Hurricane Charley initially came ashore in Florida at Sanibel Island, located in Lee County and just outside of Fort Myers. Then it immediately ricocheted off Sanibel and moved into Port Charlotte, located in Charlotte County. While President Bush declared Charlotte County a disaster, he didn’t do so for Lee County. Consequently, tax breaks for disaster losses were unavailable to Lee County property owners, though their losses might have been just as devasting as those suffered by their Charlotte County neighbors.

What’s ahead. Part three will focus on more highlights of write-offs available for individuals who suffer casualty losses in disaster areas declared by the president to be eligible for federal assistance.

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