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Taxpayers -Top 10 IRS’s Tips Deducting Casualty Losses



Barry Fowler Tax Advisor

If a taxpayer suffers damage to their home or personal property, they may be able to deduct the loss they incur on their federal income tax return. If their area receives a federal disaster designation, they may be able to claim the loss sooner.

Damage that occurs as a result of natural disaster, fires, accidents, thefts or vandalism are often tax deductible if the loss is major and not covered by insurance or other reimbursement. It’s important to be aware of the help the IRS provides in the event of a disaster.

Casualty Loss

A taxpayer may be able to deduct a loss based on the damage done to their property during a disaster. A casualty is a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism.

Normal Wear And Tear

A casualty loss does not include losses from normal wear and tear. It does not include progressive deterioration from age or termite damage.

Covered By Insurance

If a taxpayer insured their property, they must file a timely claim for reimbursement of their loss. If they don’t, they cannot deduct the loss as a casualty or theft. Reduce the loss by the amount of the reimbursement received or expected to receive.

When To Deduct

As a general rule, deduct a casualty loss in the year it occurred. However, if a taxpayer has a loss from a federally declared disaster, they may have a choice of when to deduct the loss. They can choose to deduct it on their return for the year the loss occurred or on an original or amended return for the immediately preceding tax year.

This means that if a disaster loss occurs in 2017, the taxpayer doesn’t need to wait until the end of the year to claim the loss. They can instead choose to claim it on their 2016 return. Claiming a disaster loss on the prior year’s return may result in a lower tax for that year, often producing a refund.

Amount Of Loss

Figure the amount of loss using the following steps:

  • Determine the adjusted basis in the property before the casualty. For property a taxpayer buys, the basis is usually its cost to them. For property they acquire in some other way, such as inheriting it or getting it as a gift, the basis is determined differently. For more information, see Publication 551, Basis of Assets.
  • Determine the decrease in fair market value, or FMV, of the property as a result of the casualty. FMV is the price for which a person could sell their property to a willing buyer. The decrease in FMV is the difference between the property’s FMV immediately before and immediately after the casualty.
  • Subtract any insurance or other reimbursement received or expected to receive from the smaller of those two amounts.

One Hundred Dollar Rule

After figuring the casualty loss on personal-use property, reduce that loss by $100. This reduction applies to each casualty-loss event during the year. It does not matter how many pieces of property are involved in an event.

10 Percent Rule

Reduce the total of all casualty or theft losses on personal-use property for the year by 10 percent of the taxpayer’s adjusted gross income.

Future Income

Do not consider the loss of future profits or income due to the casualty.

Form 4684

Complete Form 4684, Casualties and Thefts, to report the casualty loss on a federal tax return. Claim the deductible amount on Schedule A, Itemized Deductions.

Business Or Income Property

Some of the casualty loss rules for business or income property are different from the rules for property held for personal use.

Call the IRS disaster hotline at 866-562-5227 for special help with disaster-related tax issues. For more on this topic and the special rules for federally declared disaster-area losses see Publication 547, Casualties, Disasters and Thefts. Get it and other IRS tax forms on www.IRS.gov/forms at any time.

Have a question? Contact Barry Fowler

Barry Fowler is licensed to represent taxpayers before the Internal Revenue Service (IRS) and is a longstanding member of several tax industry professional organizations including the National Association of Enrolled Agents (NAEA), National Association of Tax Preparers (NATP), Texas Society of Enrolled Agents (TSEA), and the American Society of Tax Problem Solvers (ASTPS). With experience in the tax and finance industry spanning over twenty years, Fowler’s expertise includes tax resolution, personal financial planning, tax return preparation, financial statements, and general ledger bookkeeping. He has been instrumental in helping hundreds of people resolve complex tax issues with the IRS.

One comment

  1. John says:

    If you suffered hurricane damage this year as a result of Irma, Harvey, or Maria, a new set of rules apply.

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